Insurance and Business Risk Management

Insurance serves as a vital mechanism for protecting businesses against financial losses resulting from various risks, including fire, theft, and accidents. By safeguarding assets and covering third-party liabilities, insurance ensures business continuity and allows traders to concentrate on growth without the constant fear of catastrophic losses. The key risks covered by insurance include property damage, public liability, and fidelity guarantees. Through the pooling of risks, insurers collect premiums from a large group of policyholders, utilizing these funds to compensate those who experience losses while covering operating costs, shareholder dividends, and investments.

Insurable and Non-Insurable Risks

Not all business risks can be insured. Insurable risks—such as fire and theft—are measurable through historical data, allowing insurers to calculate fair premiums. Conversely, non-insurable risks, including poor management decisions, changing consumer preferences, and natural disasters, are unpredictable and difficult to quantify, posing challenges for insurers in determining appropriate premiums.

Principles of Insurance

Several foundational principles govern the insurance industry:

• Insurable Interest: This principle mandates that only individuals who would suffer financially from a loss can insure an item. This discourages third parties from insuring someone else's property.
• Utmost Good Faith (Uberrima Fides): Both the insurance company and the policyholder must act in good faith, disclosing all relevant facts truthfully. Failure to provide complete information can render the contract void. This principle is critical during the completion of a proposal form, as it enables the insurer to accurately assess risks and set suitable premiums.
• Indemnity: The principle of indemnity aims to restore the insured to their previous financial position without allowing them to profit from the loss. This principle does not apply to life assurance or personal accident insurance involving loss of limb. The insured must avoid both over and under-insurance. Indemnity works alongside two concepts: subrogation and contribution.
  • Contribution: Refers to the scenario where an item is insured with multiple companies, obligating them to share compensation costs proportionately.
  • Subrogation: Allows the insurer to claim ownership of any remains or recovered items once the insured is fully compensated, preventing double compensation from both the insurer and the damaged item.
  For example, if a computer insured for K2,000,000 incurs damage with repair costs of K1,800,000, the insurer will pay only K1,800,000, aligning compensation with the actual market loss.
• Proximate Cause: Compensation is only payable if the insured risk directly causes the loss. For instance, if a car insured against theft is damaged in an accident, no compensation will be awarded since the damage did not result from the insured risk.

Steps for Obtaining Insurance Coverage

The process of obtaining insurance coverage involves several steps:

1. Approaching an Insurer: The first step is to contact an insurance broker or company.
2. Completing a Proposal Form: The applicant must fill out a proposal form truthfully, allowing the insurer to assess risk accurately and calculate the premium.
3. Issuance of Cover Note: After paying the premium, a cover note may be issued, which can be used for claims prior to receiving the formal policy.
4. Receiving the Policy: The insurance policy outlines all terms and conditions related to the coverage.

Making a Claim

To make a claim, the insured must:

1. Notify the insurer and relevant authorities of the loss.
2. Disclose any involvement of other insurers.
3. Complete a claim form for assessment by the insurer's representative.

After evaluating the damage, the insured signs an agreement to accept the calculated compensation. The insurer then compensates or replaces the item, taking possession of any remains through subrogation.

Role of Insurance Brokers

An insurance broker serves as an intermediary between clients and insurers, providing essential services such as advising on policies, obtaining quotes, collecting premiums, and handling claims for a commission known as brokerage.

Types of Insurance

1. Life Assurance: Offers coverage for death, with additional options for disability or retirement income.
2. Property Insurance: Covers businesses from loss or damage due to unforeseen risks.
3. Liability Insurance: Provides protection against claims resulting from injuries or damages.
4. Business Interruption Insurance: Compensates businesses for losses during interruptions caused by unforeseen events.

Conclusion

In conclusion, insurance plays a crucial role in managing business risks, providing a safety net that enables companies to operate with confidence. Understanding the principles of insurance, types of coverage, and the claims process is essential for business owners to make informed decisions and protect their investments.