Ways to Manage Business Risk
To properly manage risk, a company should evaluate whether it is a good option to obtain insurance. Insurance is used by companies to protect and cover the insured for certain types of losses. Therefore, a business should consider whether a certain type of loss is likely to occur, when or how often it could occur, and how serious the loss could be.
For example, if a company is headquartered in a hurricane-prone area, then it will likely obtain coverage for hurricane damage, flooding, or both. This type of coverage could very well be mandatory if a business has a mortgage from a federally regulated or insured lender. Even if it is not, the company will likely determine that paying the premiums for such coverage is more important than taking the risk of a hurricane putting them out of business. In other words, from a risk-management perspective, paying for hurricane coverage is a more shrewd business decision than going without coverage and risking what could be serious damage by a hurricane.
A similar analysis can be made for those living in California and dealing with earthquakes. An earthquake is likely to occur in certain parts of California, and the potential damage could be severe. Earthquakes are typically not covered under a general commercial policy. However, a business may purchase separate commercial earthquake insurance if it qualifies. Therefore, from a risk-management perspective, it would likely be in a business's best interest to obtain the appropriate coverage. The failure to do so could have serious and costly ramifications, which is a risk that that most businesses would likely see as not worth taking.In today's gig economy, an independent contractor may be responsible for covering and insuring risks related to the performance of their job. For example, Uber drivers may be offered coverage for accidents under Uber's master auto insurance policies. However, many other start-ups in the gig economy may not extend coverage to such independent contractors, requiring these individuals to obtain their own insurance coverage.
Types of Business Risk That Can Be Managed
Key Employee Insurance Coverage
|Key Employee Life Insurance||The employer buys a life insurance plan that pays out if a specific employee dies.|
|Key Employee Death Insurance||The insurer pays death benefits to the employer, which the employer uses to recruit a replacement.|
|Key Employee Retirement Insurance||The employer uses the policy's cash value to pay the employee's retirement fund and to recruit a replacement.|