The Rural Voice, 2000-01, Page 36There are w .
maximize yo
investment in
insurance
By Dael• Bierworth
Business, -
Management
Specialist
Last summer, a number of
tornadoes were reported in
Central Ontario and people
have been commenting on the
payouts from different insurance
policies, the costs of premiums and
the need to re-examine their
insurance policies. Let's take a look
at the use of insurance for the small
business person.
As a starting point we need to
understand insurance. To make better
informed purchases and examine
insurance alternatives, we need to
understand some basics of insurance.
Before you contact an agent, you
need to understand that insurance is
to cover risks that you are not
prepared to accept yourself. Then
you need to decide what is adequate
and affordable for your situation.
Insurance is one means of having
financial protection against the risk
of unexpected or uncontrollable
losses. Insurance does not remove the
risk, but it compensates you, at least
in part, for the loss experienced. You
trade premiums to an insuring
company for the assurance. that you
will have this financial coverage for
the risks you decide to share.
Insurance works on the principle
of spreading or sharing risk. Large
groups of people can pool or transfer
risks to an insurance company. The
cost of your premium, is based on:
the frequency of losses by a given
32 THE RURAL VOICE
group in the past, and the cost of
company administration, divided by
the number wishing to be insured.
Operating a small business or
farm is a risky venture. This makes
the life of the entrepreneur exciting
and indeed is the thing that separates
an entrepreneur from an employee.
Various risks are experienced with
operating a business, some of these
go beyond that of profit from the
buying and selling of goods. Other
risks may include: risk of property
destruction; liable acts; income risk
from various factors such as weather,
uncontrollable market fluctuations
and government policy; personal risk
to your life, the life of a partner or
employees and risk of poor health to
of any of these people, which results
in an adverse effect on your income -
making ability.
Each individual has a different
mental, family and financial
institution that will affect their ability
to accept more risk. The risk taker
may be identified as one with
sufficient financial reserves to cover
a potential loss or have a situation
where less personal hardship would
occur from the risk. An example may
be a person with a will to accept risk,
who has no debt and be in a situation
with lower family demands.
The risk avoider may have a
problem accepting uncertainty, have
considerable debt load, a tight cash
flow, or have a young family that
will be their responsibility for some
years.
What we see here is that the same
risk has a different effect on various
business owners. You need to assess
your situation and then decide on
which risk you will transfer.
The essential part of assessing
insurance needs is to predetermine
the risk most likely to affect your
business and your ability to accept
the effect of these various events.
What Risks Should Be Kept and
Which Transferred to an Insurance
Company?
The diagram below may help to
categorize various risks for your
operation and so give some insight
on the appropriate action that should
be taken.
Probability
Cost per Incident
Low
High
of Mishap
Low High
#1 . #2
#3 #4
1) In #I situation, Low cost per
incident — Low Probability of
Mishap; most managers will decide
to keep the risk as they can afford the
cost should it occur. e.g. pet being
killed
2) For #2 scenario, Low cost per
incident — High Probability of
Mishap; the manager will assess the
effect the risks would have on their
operation and family. These risks
could be kept, but may be managed
by other alternatives. e.g. low ,prices.
This may be addressed by
diversification of your business.
3) In #3 situation, High cost per
incident — Low Probability of
Mishap; the costs could end a
business venture or have a serious
effect on your family. These risks are
usually transferred to an insuring
company for a reasonable premium.
e.g. property damage/disability.
4) In situation #4, High cost per
incident — High Probability of
Mishap: the cost of coverage will be
high. This area represents a real
challenge to the manager and the
solution will depend on your
acceptance of risk and your financial
situation. Another option, is to look
at methods that may help reduce the
risk, so that premiums become more