Purchasing risk protection insurance is a way of reducing the financial impact of a business interruption, loss or damage to a facility or equipment.
Insurance doesn't actually reduce your business' risks. It simply provides coverage and protection against the losses associated with some risks. Typical risks you can insure against could be: fire, theft, vandalism, workers compensation, legal costs, protection from injury or property damage to a third party, or business disruption.
Types of business risk insurance
Commercial business risk insurance typically covers five basic areas:
- property insurance
- crime insurance (including data breach cover)
- business interruption (or business continuity) insurance
- liability insurance
- equipment breakdown insurance
Some business insurance you must have by law, such as employers' liability insurance, commercial motor insurance and professional indemnity insurance for certain professions.
Liability insurance is designed to pay any compensation and legal costs that arise from neglect or breach of duty. For more information, see liability insurance.
Business interruption policy can help insure against loss of profit and higher overheads resulting from, say, damaged machinery.
Other types of business insurance exist, such as key man insurance, credit insurance, money policies, legal expenses, etc. Employers can even buy life insurance or private medical insurance for a whole group of employees. See detailed guidance on the different types of insurance.
How do insurance companies mitigate risk?
Risk insurance provides a level of financial compensation in the event of a loss. Insurers only pay the compensation if the loss is insured by a valid policy.
Insurance companies increasingly want evidence that business risk is being managed. Before they provide cover, they may want proof that you have processes in place to minimise the likelihood of a claim. You can ask your insurance adviser for advice on appropriate processes - see how to choose an insurance adviser for your business.
It is important to review your policies regularly to determine if they adequately cover your potential losses. To review your policy, you should:
- carry out regular risk assessments to identify potential hazards to your business
- use business impact analysis to quantify potential impacts
- examine the level of policy and the coverage you currently have
- consider all the risks and their outcomes to determine the required level of insurance
Having the right policy in place can be crucial for your business' survival, but keep in mind that some costs may be uninsurable, such as the damage to a company's reputation.