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Home » Insurance
Mitigate Business’ Financial Risks with Insurance
Category :- Insurance

Author :- Steve Davids 
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Posted on November 27, 2017, 12:22 pm
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All businesses are at risk of experiencing accidental losses. However, there are ways to manage risk via two basic options: risk transfer and risk retention.

Risk Transfer

It is common for many businesses to transfer risk by purchasing an insurance policy. By paying a set premium, a business can transfer to an insurer the risk that certain types of losses may incur. Thus, the insurer takes on the risk that the losses might exceed the amount of premium it collects from the insure – hence, transferring risk.

Some businesses also transfer risk via what’s known as an indemnity agreement in a contract. In this type of agreement, one company agrees to indemnify – that is, reimburse another company for the costs of certain types of claims or losses. Indemnity agreements are a common business practice of risk transfer.

Risk Retention

Simply put, risk retention is self-insurance. Some businesses will choose (or are obligated by an insurer) to retain a certain amount of risk. Typically, larger companies will have more options pertaining to self-insurance than small companies, as larger companies generally have a higher amount of capital and thus a greater capacity to absorb any losses. Still, small businesses can take advantage of many of the benefits of risk retention.

The Benefits of Risk Retention

One primary advantage of risk retention is that it lowers the cost of insurance. That is, by assuming some risk, companies can keep a percentage of the money that they would otherwise have had to pay out to the insurer. Self-insurance also allows companies to assume more control of the risks they have chosen to retain.

The Drawbacks of Risk Retention

Despite the many benefits of risk retention, there are 

some disadvantages to it as well. Firstly, a company may experience higher out-of-pocket costs than initially anticipated. Secondly, risk retention can come with a certain degree of administrative or red tape hassles. For example, if a company decides to self-insure on company vehicles, the company then must assume all responsibility for every aspect of having them repaired in the event of any vehicular damage. Risk transfer, on the other hand, can largely transfer that responsibility to the insurer.

Types of Risk Retention Used By Small Businesses

There are a few different types of risk retention strategies of which small businesses can take advantage. Deductibles are a fairly common strategy of risk retention. Deductibles are often an effective way for small businesses to lower their premiums if the business has the capital and/or financial resources to pay losses out-of-pocket.

General liability or vehicle liability coverage deductibles are also a common way in which companies can reduce losses, by filing for property damage or making claims under commercial or vehicular liability policies.

It is important, however, for companies to understand the terms of their deductibility agreements. For example, companies could lose money paying into high premium or deductible fees. As such, it is critical for any company to know the intricacies of their insurance policies to avoid high or unnecessary deductible costs.

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