When you
have a business, there are various risks involved that could result in the
failure of your business. However, not all the risks can be insured.
Factors
determining uninsurable risk
A risk is
uninsurable when an insurance company cannot calculate the probability of the
risk and therefore cannot work out a premium that the business must pay. For
example, you cannot take out insurance against possible failure of your
business.
Risk is
too widespread, for example, when there is a war in the country.
When the
loss is incurred due to your own deliberate actions, it cannot be insured. If,
for example, you have financial problems in your business and decide to set
fire to your business in order to get a cash payout from insurance, this will
be a void claim.
You
cannot insure a business for:
price
fluctuations from the time the order for goods is placed and the delivery of
the goods
different
price levels at different places
new
inventions that replace old technology, eg. in the IT industry
nuclear
weapons or war
changes
in fashions when goods become obsolete
Factors
determining insurable risk
If the
insurance company has enough statistics to work out the probability of the
risk, this is called an insurable risk.
Actuaries
are highly qualified people working for insurance companies; their role is to
work out exactly what risks the company will carry. The degree of the risk will
influence the insurance premium.
Some
examples of insurable risk
Fire
insurance
A fire
insurance contract is a contract of indemnity for losses suffered due to a
fire. A building and its contents can be insured against fire, but additional
clauses must be added for damage by hail, wind or riot. Fire insurance is
expensive - the bigger the risk, the higher the premium. The fire insurance
will also have a clause called the iron safe clause. All books and records must
be kept safe to backup the claim after a fire.
The book
value and the market or replacement value of insured property
Assuming
a building is insured for R100 000 (book value), and the replacement value is
R300 000. Should the building burn down, the insurance company will only pay
out the R100 000 and the owner of the building will lose R200 000 should it be
rebuilt.
Storm,
damage and theft
This is a
common insurance contract that will protect a homeowner's house building
(homeowners' policy) and the contents of the house (householders policy).
Money in
transit
Banks
make use of armoured vehicles to transport cash to cash depots and to their
outlets. A policy can be taken out for the amounts transported.
Fidelity
insurance
An
employer can take out fidelity insurance to protect his business against
dishonest employees