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 pay out 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 insuranceA 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 theftThis 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 transitBanks 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 insuranceAn employer can take out fidelity insurance to protect his business against dishonest employees.