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Business Insurance: What Does It Cover?
Business Insurance, also known as commercial insurance, is insurance made for and purchased by businesses to cover specific operational risks. Such operational risks will range in terms of their statistical relevance to a business in terms of both frequency and severity (ex. a fire loss can have a low frequency high severity impact whereas a credit loss can have a high frequency high severity impact). There are many different types of business insurance products, each serving a different function as it relates to protecting specific risks whether physical, cyber, or financial risks. It's important to note that all business insurance products must be reworded and triggered independently of insurance brokers, companies, or lobbyists in order for a business to get the best value from such products. Many executives, whether CEOs at smaller companies, CFOs at mid-sized companies, or CROs/CLOs and their teams at larger companies, make the mistake of buying business insurance directly from insurance brokers without the assistance of independent risk experts in the rewording and triggering of the insurance. This results in many businesses buying bad and expensive insurance that does little to protect the business for core, let alone paying on large losses for initially intended risks (avg. payout ratio on large losses < 25% in developed market jurisdictions and much lower in emerging market jurisdictions).
Types of Business Insurance
There are many different types of business insurance products and there is no one standard way of categorizing them within the insurance and risk management communities. DeshCap broadly categorizes each type of business insurance based on 3 risk categories within which the business insurance product is intended to protect the business against a specific subset of risk: 1. Physical, 2. Cyber, or 3. Financial. For example, property insurance would mainly cover against certain risks within the Physical Risk category such as fire or flood resulting in physical damage to buildings and property. Credit insurance on the other hand would mainly cover against certain risks within the Financial Risk category such as delayed payments leading to protracted or actual defaults. There numerous sub-categories of risk and it is important to match the sub-categories of concern to the business to the right type of business insurance, which has to be reworded and triggered independently from brokers, insurers, or insurance lobbyists.
Business Insurance: Why Do Business and Investors Need It?
If the business insurance is structured and triggered correctly according to the relevant risks of a business, it would have a direct impact on protecting cash flow when such risks materialize, in turn putting the business in a better spot versus competitors from a liquidity standpoint and ultimately a valuation standpoint. Business Insurance can also be used strategically to take advantage of unharmed liquidity post loss (ex. expanding market share by buying or investing in businesses post-loss that did not have good insurance and that got hurt financially when their risks materialized). There is a direct impact to investors when a business adopts strong insurance and risk management practices. This is evidenced by the mathematical impact of insurance on private equity returns.
This content is independent of any content coming from insurance brokers, insurers, law firms, or insurance lobbyists. Business insurance is rarely taught in schools, and when it is, it’s mostly done through the lens of brokers or insurers. There are many misconceptions around Business Insurance due to bad habits acquired such as the over reliance on insurance brokers or insurers or information providers who are lobbied by them. It is also important to note that insurance has operational and legal aspects, on which we put weights of 95% and 5% respectively in terms of importance to protecting a business and its investors (the point is that going to court to enforce coverage defeats the purpose of buying insurance, so you want to make sure that whatever insurance you buy protects the organization right and pays out fast on large losses).