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THINKING ALOUD (Business Law) BUSINESS RISKS: Self-Insurance
All business proceeds on beliefs, or judgments of probabilities, and not on certainties.— Charles W Eliot, Harvard's president in 1869
Short definition on Self Insurance
A commentary written @ Merriam-Webster
"Self insurance is an euphemism for "uninsured" or going naked and hence emphasising the risks of dispensing with insurance coverage. In truth, when parties agree on a contract of insurance, the policy often has features providing significant elements of self-insurance. Some may have policy limits; above this cap, the insured party is without insurance. Other policies may have deductible clauses, below which the insurance company will have no liability. In essence, insurance is an arrangement which the insured is in fact naked over a range of possibilities which he should know of before signing on the dotted line.
In short, do read the fine prints otherwise you may find yourself self insuring for risks you thought covered by the insurance company.
FLOOD INSURANCE – pitfalls
Writer: Chén Róng
In the minds of many Asia business people, insurance is probably an afterthought instead of an initial planning process. It is also not part of the continuing review of their business practice. For a start-up, it is important to think carefully about where a business should be situated in the first place. The rent might be cheaper in a flood-prone area but it has to be many times cheaper to equal the cost of a total uninsured loss.
Why should there be an uninsured loss, you may ask.
The number of small businesses in Asia is growing rapidly as more people are increasing finding difficulty in getting jobs in big established multinational corporations. Effects of climate change and change-induced sea level rise and subsidence, floods are now destroying many otherwise successful retail premises, workshops and a range of other small businesses in major rich Asian cities. Running the gamut, in terms of risk of high projected losses published by the World Bank, the affected cities are: Guangzhou, Mumbai, Shenzhen, Tianjin, Ho Chi Minh City, Jakarta, Chennai, Surat, Zhanjiang, Bangkok, Xiamen and Nagoya.
The biggest risk to a business owner is the inability to get any insurance company to sell him a Flood Insurance policy. If he finds one, the premium may be so preposterous that he finds self-insuring against flood risks a better option. This piece of information may come as a surprise to many business owners. When such news is not reported it does not mean the stories are just fictions. Being uninsurable raises multiple questions about the ability to conduct business at all.
To remain in an area without insurance is effectively self-insuring risk of floods. Taking on a risk that the insurance companies have decided is simply too risky, business owners are waging a risk against the experts! One way to hedge the risk is to put annual premium savings into a contingency fund. Lots of discipline has to go into such a plan.
The alternative is to move, and this raises some other business issues that a new location will bring -- refurbishing costs, downtime, customer profiles, etc. Besides, being new to an area means you are unlikely to know the local history or think to check what the insurance premiums might be before signing on a lease. The advice is: talk it over with insurance brokers the moment you identified a location considered as one probable venue for the business. Chances are, locations where the local governments or state has made adaptations of flood protection or adopted mitigation initiatives, premiums may fall or at least stop rising. The big issue of the role of government in avoiding disasters is either through the planning procedures or subsequent mitigation effort. It is something that tends to surface following a catastrophe. In many instances, such proposals simply fade away. Flood prevention programs inevitably involve spending money, and politicians would prefer to spend it elsewhere.
At times municipal authorities settled for less costly methods such as sandbags stacking around affected areas; and the use of extra water pumps to drain away floods. These mitigation initiatives are unlikely to impress the insurance companies into lowering of flood premiums. If business owners have their factories located in low lying areas -- huge industrial estates such as those in Ayutthaya or other provinces north of Bangkok, such properties will have difficulty securing flood insurance. If insurances are available, the annual premiums may be prohibitive.
For all others who found suitable places for relocation; once businesses are settled in, flood hazard maps should be routinely checked as part of the due diligence as if owners are about to make a property purchase. Flood Hazard Maps show information about places that may be at risk from flooding. One can view reports, photographs, newspaper articles and other information about reported floods. Many businesses, both big and small ones, fail to take similar precautions when renting business premises. From the writer's perspective, long-term renting of premises is never a good business strategy. This is a different story for another occasion. In short, MacDonald’s apparently sitting on billions of dollars in capital gains on its global real estate.
Self-insuring against flood risks is not a good long-term strategy. Without continued efforts to boost protection, floods can only get worse with population growth, and especially if businesses are in poorer cities with few or no protection upgrades. The intensity of Typhoon Usagi-2013 (probably the strongest typhoon ever encountered in southern China) demonstrates that more ferocious storms can be expected in coming years.
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Appended below: ChénRóng’s Little English-Chinese Dictionary for a more precise translation of select English phrases from the article.
Chen Rong's Little Dictionary of English-Chinese translation
Chen Rong de xiǎo zì diǎn
…here is my take
wǒ zài zhè gè wèn tí shàng de guān diǎn
…with deep pockets
rú guǒ yī gè zǔ zhī huò yī gè rén yǒu hěn shēn de kǒu dài lǐ， tā men yǒu hěn duō qián
...impacting their bottom-line
shì zhǐ yǐng xiǎng gōng sī de;dì;dí jìng yíng lì， jìng shōu rù huò měi gǔ yíng lì
…permutations are probably infinite
xíng dòng de zhuǎi biàn kě néng shì wú xiàn de
..may wear many hats
yǒu guān de rén chéng dān bù tóng de rèn wù， bù tóng de zé rèn
…its Archilles’ heel
jǐn guǎn zhěng tǐ shí lì de yī gè zhì mìng ruò diǎn
…go into their nitigrities jìn rù jī běn yào ling
(the owner-manager) ..works hand in glove with
( lǎo bǎn jīng lǐ) yǔ bǎo xiǎn jīng jì yīng yìng zuò chū jǐn mì de gōng zuò zī xún
..done with a fine-toothed comb
sōu suǒ huò diào chá zhōng wēi xiǎo de xì jié
Natural Catastrophe Insurance: Earthquake
WRITER: Chén Róng
Earthquake is a natural catastrophe risk or ‘nat cats” and hence insurable against as forming part of the primary insurance coverage, such as the standard business owner policy or commercial fire policy.
Would you self-insure against such catastrophe risk on your business premises?
In a country like New Zealand, the question does not arise because earthquake insurance is mandatory. But what if you have your business or industrial property in a place like Singapore, relatively safe but yet not entirely risk-free of natural catastrophe - including earth movement, mud-flow and landslide directly caused by an earthquake.
For owners who have little equity at stake, protecting their business property from earthquake damage may not seem to matter, but not many business people are able to walk away from their financial investments built over years of hard work. Preventing against financial loss should be high on the agenda, even if the chances of a devastating earthquake happening are slim. Certain properties built in the 1960s or earlier may be conservation buildings, and they are not re-fitted to withstand earthquakes or their aftershocks.
With magnitude 7.8 earthquakes or thereabouts hitting Indonesia, one cannot be too sure that sturdy tall commercial buildings in Singapore can hold their ground; and if you are in one of those pre-war retrofitted buildings, beware! When a major quake struck Iran last month, buildings swayed in places as far afield as Kuwait, Dubai and New Delhi.
Earthquake insurance is under-priced in Singapore and it may be available as an endorsement to a primary policy at subsidized rates, if one cares to negotiate for it on policy renewal dates. Other reasons why property owners should cover against earthquake risk are: Insurance companies stop selling coverage for a while after a devastating earthquake has occurred; besides, aftershocks can occur immediately following the initial earthquake and it can be more serious. Business people may also be mindful of their credit-rating with banks. If they walk away without suffering any equity loss; allowing their banks to foreclose on a property damaged by a natural catastrophe, borrowing money for another property can be challenging.
Perhaps, it does not pay to self-insure when rates are at giveaway pricing!
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BUSINESS RISKS: Self-Insurance
WRITER: Chén Róng,
Why do some merchants self-insure the risk of damage and/or loss to their goods? Would I take on such risks if I were merchant selling goods to buyers thousands of miles away? Here is my take on the matter.
Almost every insurable risk can be underwritten in-house or self-insured. But let me confine this discussion on marine cargo insurance. If I were running a multinational company with deep pockets, I might want to self-insure such risks (or some of the risks) to save on insurance premiums paid to underwriters who made profits by charging premiums in excess of expected losses. This is more so in cases where premiums are unpredictable and rising. The company with a self-insurance plan will regularly set money aside into a reserve fund. Should damage or loss occur, a ‘claim’ would be made against the fund. During the first few years of such self-managing risks, the company usually would buy regular high risks insurance for amounts in excess of a certain sum (let’s say US$250,000), which the company was prepared to self-insure. Generally, the more financial resources a company has the more risks it is able to self-insure against. This is because a wealthy company can absorb higher levels of losses before significantly impacting their bottom-line.
If a Company chooses to self-insure it will want its Reserve Fund to work by investing it probably in short-term investments that can be quickly turned into useable cash without a large loss in value. These types of investments would include money market accounts and/or mutual funds. The Company may exclude long-term investments such as stocks and bonds as these are generally not suitable for a short-term emergency fund. But if I were ask to manage this Reserve Fund; I would consider putting money into Real Estate Investment Trusts (REITS) and Business Trusts currently offering annual returns in excess of 5% at prevailing market prices. Singapore Exchange’s derivatives or products are instruments to consider for diversification when markets are volatile. Derivatives provide both upside and some downside protection. I will go no further in order not to deviate into a discussion on making investment choices, but simply put, I consider it prudent to have a mixed bag to balance risks and rewards. It is not uncommon for large multinational companies to have their own investment divisions managing a portfolio running into hundreds of millions US dollars, hence, the Company may not have to specially deploy staff to manage the Reserve Fund forming part of a bigger financial pool. I will also not discuss the advantages of such pooled financial resources as their permutations are probably infinite.
I will not advocate self-insuring the risks for a small family business or even small and medium-sized enterprise (SMEs). Doing so may prove to be its Achilles’ heel and nursing the business back to good health will be wrenching at best. These businesses lack expertise of professionals. The owner-managers may wear many hats in overseeing finance, manpower requirements, risk management, goodwill and relationship building in addition to the core trading business. Insofar as cargo in transit is concerned, there are both direct and indirect risks involved. Self-insurance may underestimate the extent of losses in any one event. Take “General Average” as an illustration. Under this Rule, if your cargo survives a voyage you may be asked to repay the losses of other shippers whose cargo may be jettisoned for the protection of all others in the common maritime adventure. Similarly, there are other losses not covered under the comprehensive “All Risks” insurance: namely, Strike, Riots and Civil Commotion, War Risk and Currency Exchange Risk requiring an insured to take up extended coverage. I will not go into their integritiesbut leave these topics to the insurance professionals to expound on. However, if an owner-manager insists on some form of self-insurance, I suggest that he/she works hand in glove with brokers and explore the most effective way to cover each of your shipment under policy-specific terms.
There are less costly although less extensive coverage besides an All-Risk policy which one may consider on a case to case basis. Moreover, market conditions change all the time and insuring shipment by shipment has its advantages particularly in a soft market with rates dropping. It does pay to shop around!
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Hubpages do not support words written in the Chinese Language. Readers can get a free online English-Chinese translation from GOOGLE TRANSLATE OR TRANSLATED.net
EXCLUSION CLAUSES in insurance policies
Writer: Chén Róng
Exclusion Clauses in insurance contract can be your unintended self-insurance for certain types of damage and loss within the perimeter of these clauses.
Do not take Exclusion Clauses in insurance policies as a matter-of-fact; that these are unalterable non-negotiable standard terms – take it or leave it - so much so that an insured simply fails to study them closely. If damage or loss comes within an Exclusion Clause, your business will have to incur a financial loss to the extent such loss or damage is not recoverable under the insurance policy.
Are you prepared for this type of self-insurance?
An insurance company will usually invoke an exclusion clause in cases when an insured's conduct may have contributed to the loss or damage to an insured peril. However, if the insured is able to prove that there is no connection between its conduct and that of the loss or damage, then the insurance company cannot make a refusal to pay out on the insurance policy. Unfortunately, things may not be as smooth sailing when loss adjusters take a closer look at the business and the chain of events. A detailed understanding of the policy and its exclusions and conditions is critical to every claim recovery; as is a clear determination of the causes that led to the damage and loss.
Let us discuss the matter with "business interruption losses" insurance on events caused by super storms or other extreme weather events. We are now experiencing extreme weather conditions in many parts of Asia and it is appropriate that we discuss exclusion clauses in the light of business income losses.
After a severe storm, many businesses will be busy recovering from closure or slowdown in the wake of its devastation. Insurance companies will be busy attending to many claims for business income losses. But recoveries may not get standardised because businesses are not the same. Adjusters and claim professional may have to spend considerable time finding out relevant details of every affected business. This is the moment Exclusion Clauses in the policy will be closely examined; and the business practice and casual sequence of events get analysed.
A business owner may present a representative period of data to measure the business income loss, but the insurance company may want to know if there are special trend or events that may have an impact on such income measurement. The business may be seasonal. Products may be for specified use and hence highly specialised. The representative period of data may be taken from a period with a one-off substantive purchase from one customer. Or was there a surge in revenue owing to a one-time special sales promotion? These questions may not always get the same answers because company-specific and industry-specific factors should be given special consideration.
Next, there is the question if there was a complete shutdown of the entire business operation. Or did the storm cause direct physical damage to the business operation? Claims for loss of profits may be denied under such a situation. Certainly, no two policies are identical. Every business owner needs to know the extent of coverage he gets. Some businesses forced to close may be able to recover loss of profit under contingent business interruption coverage. For instance, a major supplier or customer has sustained physical loss or damage because of the storm and hence indirectly incurring a revenue loss to the insured themselves.
The simple meaning of the language used is always an important indication of the agreement between the parties that the contract for insurance covers any business interruption loss caused by a peril not excluded. Therefore, physical damage may be a necessary condition for a valid loss claim. The insured peril: damage and destruction because of flooding as a result of the storm. In short, it is the peril insured against under the policy. Therefore, if the location of the factory facility has limited access and flooding caused the property to be completely inaccessible, the claim falls within the insured peril. Under this scenario, no physical loss to the facility needs to trigger business interruption loss recovery.
It is important to study the conditions and exclusions of specific coverage.
The writer is not an expert in this field so he can also provide a sample of the types of questions likely to be asked. There could be other questions such as those related to historical profit and loss data of the company. The purpose of this short article is to alert small business owners that they should get their insurance brokers to explain clearly the extent of these exclusion clauses. It should be done when business owners buy their insurances. It is a little too late when loss adjusters are at their premises studying their recovery claims. Certainly, they should also contact their business income loss professionals to ensure that they are receiving adequate payment from their insurance company.
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The writer makes no warranty of any kind with respect to the subject matter included herein or the completeness or accuracy of this article which is merely an expression of his own opinion. The writer is not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall be liable for any damages resulting from reliance on or use of this information. Without limiting the above the writer shall have no responsibility for any act or omission on his part. Readers should take specific advice from qualified professionals when dealing with specific situations.