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Running a business is inherently risky. Business owners must protect themselves and their companies as much as possible against all potential threats. Purchasing business insurance is one way to mitigate risk and reduce losses caused by unforeseen events.
As a business owner, you’re likely familiar with how to file an insurance claim. However, many owners aren’t aware of how insurance companies view risk and how risk factors affect coverage and costs.
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We’ll examine the concept of risk in business insurance, explain how insurers assess risk and share ways to reduce your risk exposure.
Insurance risk is an assessment of the actuarial likelihood that an adverse event will occur and result in a loss. Actuarial models use mathematical and statistical techniques to analyze historical insurance claim data to model how likely an adverse event is to occur for a specific business and what the cost might be.
If the adverse event comes to pass, you’ll file a claim with your insurer. The insurer will pay out on the claim if it’s a qualifying event.
Business insurance costs are based on an insurer’s assessment of how likely your business will become victim to the qualifying events you want protection against.
A business owner buys an insurance policy to gain financial protection from specific risks or dangers. After purchasing the insurance policy, a risk transfer takes place. The insurance company assumes the risk in exchange for a regular payment, called a premium.
After the insurance company assumes the risk of financial loss, it places the business in a “risk pool,” a large group of businesses that share common risks of incurring losses. In other words, the insurance company spreads its financial risk over a large pool of premium-paying contributors.
Actuarial models provide insurers with a statistics-based estimate of the following:
Consider these actuarial models a “macro” assessment. After that, underwriters conduct a “micro” assessment to tailor the risk evaluation to a specific business.
To do this, underwriters gather information about their potential client to create an individualized assessment. For example, if the business has a burglar alarm and keypad entry to the inventory room, the risk is lessened. However, the shop may be in an area with higher crime rates, increasing the risk.
Underwriters will look at objective and subjective information:
At the end of this process, the insurance company will offer you a premium that reflects its view of your individual risk profile.
Underwriting is not a one-size-fits-all approach. Each insurance company has its own determining factors when evaluating a risk pool.
Here’s an overview of eight common insurance risk categories in business and the policies that can help cover them.
Liability insurance covers your business’s legal responsibility to prevent physical or financial harm or damage to others. Several types of policies are tailored to specific liability risks. Here are some examples:
Builders’ risk insurance is liability insurance for people and companies involved in a project where a new building is under construction. It can compensate stakeholders for losses related to delays, including additional loan interest and lost rental income.
Commercial property insurance covers damage to your business’s physical assets, including real estate, inventory, supplies and materials, office furniture and electronics, signs and fixtures.
Common occurrences that commercial property insurance covers include a fire breaking out in your warehouse, causing damage to a significant proportion of your inventory or intruders stealing from and vandalizing your store.
Following an incident like a fire destroying a warehouse and its inventory, it may take a while for a company to recover enough to start doing business again.
In addition to commercial property insurance, business interruption insurance may be a sensible investment in these situations.
Depending on the coverage you negotiate with your insurer, you’ll receive funds to replace your lost revenue. You’ll also get help to continue paying fixed expenses like rent and salaries. This financial help may be the difference between closing permanently and reopening.
Several cyber risks can lead to devastating data breaches, including the following:
Data breach costs can be overwhelming, making cyber insurance a must for many businesses. There are two primary types of cyber insurance ― cyber liability insurance and data breach insurance. If you hold and process sensitive data on computer systems and via paper records (like a medical practice, for example), you’ll need data breach insurance to cover the loss of nondigital records. That said, many cyber liability insurance policies will also cover this loss but check the small print before signing up.
Create a cybersecurity plan to reduce your cyber insurance premiums.
Employee-related risks can take several forms. The following policies can help cover some of these risks:
Your state may allow workers’ compensation exemptions, releasing you from the obligation of purchasing a policy. If you have no employees but must satisfy insurance requirements from clients, partners or suppliers, consider taking out a workers’ compensation ghost policy.
Many businesses, particularly in manufacturing and extraction, are subject to more regulations because of the effects of their activities on the environment. For example, they may have a tank at a manufacturing plant leaking chemicals into a nearby river.
For companies in these sectors, environmental liability insurance can help cover the costs of failing to meet these obligations.
Third-party risks vary by business and industry but can include the following:
Leadership risks can include the following:
A business owner’s policy (BOP) often combines general liability, business income insurance and commercial property insurance into one policy.
Some of the costliest insurance claims made by small businesses include the following:
Type of claim | Average claim size | Suitable types of insurance |
---|---|---|
Reputational harm | $50,000 | Reputational harm insurance and commercial general liability insurance |
Vehicle accidents | $45,000 | Commercial auto insurance |
Fire | $35,000 | BOP, commercial property insurance, commercial fire insurance and business interruption insurance |
Product liability | $35,000 | Product liability insurance |
Customer injury or damage | $30,000 | BOP and commercial general liability insurance |
Wind and hail damage | $26,000 | Commercial property insurance |
Customers slipping and falling | $20,000 | BOP and commercial general liability insurance |
Water and freezing damage | $17,000 | Commercial property insurance |
Struck by object | $10,000 | Workers’ compensation insurance, general liability insurance and BOP |
Theft and burglary | $8,000 | BOP and commercial general liability insurance |
These recommended policies are examples, but it’s critical to check with your insurer for policy details and speak with an insurance agent or insurance broker to address your specific business needs.
The primary way to reduce risk is to institute a formal loss control program, which helps policyholders reduce claims using risk management and safety resources and training.
Here are a few other ways to reduce risk.
Some insurers offer risk management programs for their insurance policyholders. Other insurers also provide risk control representatives who can give suggestions and guidance.
For example, your risk control consultant can guide you through the contractual risk transfer as you enter into a contract with an outside entity, such as a subcontractor, tenant or service provider, which creates a new set of risks and liability issues.
Insurance companies help policyholders mitigate risks associated with auto accidents. For example, a common risk is distracted driving.
In recent years, some of the best GPS fleet management services have introduced artificial intelligence-powered dashcams that can warn drivers when they’re distracted. They can tell whether a driver is eating, drinking, smoking, using a cell phone and more. They immediately alert the driver and send information to the company’s fleet manager.
Your business can also use risk management software with fleet tracking software to analyze data from previous accidents and claims to learn how the risk could have been mitigated.
Conduct a cybersecurity risk assessment to determine your vulnerability to internal and external data breaches. Successful approaches include using a business virtual private network (VPN) instead of remote PC access software because a VPN allows for data encryption and protects sensitive or private information.
Healthcare companies that must comply with the Health Insurance Portability and Accountability Act face extra challenges. Any covered entity or business associate that collects, processes or stores protected health information is required to implement security and privacy controls to protect its confidentiality, integrity and availability (also known as the “CIA triad”).
Employees should also use only company-authorized devices for remote work and dispose of company documents properly.
Nicole Urbanowicz contributed to this article.