ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Financial Aspects of Insurance

Updated on August 30, 2013

In general, insurance for insurable risks falls into two broad groups: liability and casualty. Companies buy insurance to prevent financial impairment due to an action that would make the company liable to a third party. Companies also buy insurance to offset possible losses stemming from interference with operations. This latter is a wide-ranging classification, embracing work stoppages resulting from fire, flood, machinery breakdowns, labor difficulties, theft and bad credit risks.

The interrelationship between insurance needs and the financial health of a corporation is such that insurance is properly the responsibility of financial managers. It is a complex subject, involving financial and legal considerations. Large companies may have an insurance officer or a risk manager, as he sometimes is called. Smaller firms usually assign the task to a ranking member of the financial department.

Defining the Risks

Analyzing a company’s pssible exposure to risks which can be insured is not as easy as it may appear. The obvious perils are one thing. These include fire, burglary, accident, water damage, and the like.

Other risks are not so easily identified. Take the case of a display manufacturer who unknowingly uses inflammable materials for his designs. What is his liability if the materials cause cause a customer’s facility to catch fire? Or consider a firm that charters a vessel for an employee fishing party. If the boat sholud sinks, or if individuals are hurt or lost, is the company financially responsible?

The answer are not important here. But the examples serve to underline the fact that risk exposure covers a multitude of possibbilities. Right from the start, therefore, a business should analyze its possible liabilities and arrange for adequate coverage.

Insurance against operating losses should also be thoroughly investigated. A machine may break down, or a raw material may not be delivered on time. Production is set back, deliveries are delayed, and receipts are postponed. Revenue may be lost entirely if the customers seek another source of supply.

Naturally, not all possible perils can be foresee. Nor for that matter would a company deem it necessary to provide insurance for all the risks it could envision. In so far as it is practicable, the extent of possible loss or liability should be defined. Also, the chances for it occurring have to be considered. A company may be willing to take a calculated risk, weighing the cost of the insurance againts the eventuality of anything adverse happening. In short, probability plays a large role in determining what risks the company insures againts.

What Approach to Take

A program of risk analysis is not just confined to buying or not buying insurance. Whatever possible, the risk must be eliminated. Some exposures, of course, can’t possibly be controlled. For example, driver education and proper maintenance of vehicles can help measurably to reduce accidents. But they won’t eliminate them entirely, and so the potentialliability ca be great.

Management has a responsibility to correct all conditions which are potentially hazardous. Providing adequate coverage for perils should be viewed as a necessary but alternative function. The first step should always be to attempt to do away with the risk:failing that, the company should seek to controlit.

Insurance seldom covers the full extent of a loss. A company may recover substantially all the cost for brick and mortar and equipment for a facility gutted by fire. However, there are also the indirect costs involved. These may, in the long run, be far more expensive to the company. For example, the loss in profits due to the company’s inability to continue to operate won’t be recovered by the fire insurance policy. The company’s possible loss of position in the market is another factor. Also, necessary development work may have to be curtailed, leading to a future competitive disadvantage.

Types of Risk

The following are risks which a company generally faces:

  1. Damage or destruction of physical assets. Included in this classification are losses or damage suffrered to real or personal properties. Real property consists of land, buildings, and appendages such as elevators, furnaces and plumbing fixtures. Personal properties range from inventory to furniutre to vehicles. Standard coverages for such losses include fire, ocean marine, machinery breakdown and crime insurance.
  2. Losses affecting income. There are perils which, while causing physical damage, also adversely affect earning power, Businesses can obtain insurance which will cushion the effect of loss profits and help defray extra expenses if the business is such that oprations have to be carried on regardless. On a personal basis, insurance can also be used to provide income for the families of individuals who lose their live, or as compensation in the event of accidental injury, physical disability or sickness.
  3. Third party legal liability. A company may be responsible for personal injures and property damage to those outside its employ as well as those within it. This responsibility can prove to be especially serious because a liability award can be so large that it becomes a financial burden. Furthermore, the liabilityma y be incurred whether or not there was any negligence. And it may result from the action of a company’s agent

Comments

    0 of 8192 characters used
    Post Comment

    No comments yet.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)