All types of insurance do one thing – they exchange a small, certain payment for a large, uncertain loss. Basically, this means that you pay a small fee and fixed intervals (your premium), and the insurance company will take the risk should any losses ever occur.
Take, for instance, a flood. Floods are often destroying business property and inventory, but it is impossible to know when one will, if ever occur. If you were able to tell when a flood would occur, you wouldn’t need homeowner insurance (). But because you can’t, taking out a flood insurance policy can help you to replace the things that you lose when there is a flood.
Group statistics can be calculated:
While you cannot tell what your chances of a flood, fire, or other disaster will be, your business group as a whole has set statistics. For instance, if you own a bakery, your risk of having a fire destroy your business is higher than the risk of a fire taking down an office building. Knowing that, you could decide that as a bakery owner, your risk of having a fire is higher, and you therefore need more insurance. If you are an office owner, you could decide that your risks are lower and that you need less insurance. Every business and every individual needs certainty, and insurance can help to provide certainty in an uncertain world.
All insurances are similar:
Fire insurance is not terribly different from flood insurance, and flood insurance is not any different than life insurance. To a certain extent, all insurances are the same. If you work with life insurance, then you know that approximately 3.8% of people die before they are 25. This means that another 96.2% don’t, but you have no way of knowing which of the two groups you will be in. All you can do is calculate your personal risk. The higher your risk, the higher your premium will be.
This is true of all types of insurance, including home owner’s insurance. Property owners never know how good their title is. A merchant doesn’t know how much he will lose on a given debtor. However, when you look at a large enough group, you can get an idea of what your individual risk is. Everything you do in business has a certain risk to it. On your own, you cannot determine what the risk is, but as a member of a business group, you know what the statistics are for that group.
What insurance does for your business:
Business has risk. There is the risk of losing property, losing life or health of employees, or losing money, among others. What insurance does is give you some guarantee against these losses. By knowing what your risk factor is, and insuring it appropriately, you will know that you have what you need sure an incident ever occur.
