This article focuses on business insurance. It provides an analysis of the different types of business insurance including business owner's insurance policies, business liability insurance, workers' compensation insurance, key employee life insurance, business disability insurance, marine insurance, business interruption insurance, computer insurance, business automobile insurance, and crop insurance. The main uses for business insurance, including deferred compensation funding, buy-sell agreements, and corporate risk management, will be described and analyzed. The issues associated with the use of business insurance as a risk management tool will be addressed.
Keywords Business Automobile Insurance; Business Insurance; Business Interruption Insurance; Buy-Sell Agreements; Captive Insurance; Deferred Compensation; Geopolitical Risk; Insurance; Key Employee Life Insurance; Liability Insurance; Pure Risk; Risk Management; Speculative Risk
Business insurance refers to insurance coverage purchased to protect against loss exposures and risks for business firms. Business insurance is one of the most common and important corporate risk management strategies used today. Risk management, which refers to the process of evaluating, classifying, and reducing risks to a level acceptable by stakeholders, is common practice in both the public and private sectors. Businesses purchase insurance as a means of transferring the risk away from the business to an outside party. Insurance needs vary between businesses and industries. In the United States, businesses are required by law to have at least three main types of insurance including unemployment insurance, social security, and workers' compensation. Businesses choose supplemental forms of insurance to protect themselves from potential risks. Business insurance is targeted at specific business risks. Business risks include pure risk, speculative risk, operational risks, market risks, cultural risks, economic risks, political risks, and credit risks, equity risk, equity index risk, interest rate risk, currency risk, and commodity risk.
Examples of risk scenarios covered by business insurance include terrorism, fire, death of key employees, customer injuries on the premises of the business, and natural hazards such as earthquakes and hurricanes, procedural errors; internal control failures; failure of information processing equipment; malicious or fraudulent actions by individuals; workplace safety issues; succession failures; unintentional failures to protect clients; damage to physical assets; failures to follow regulations; business disruptions including terrorism and vandalism; computer and network crashes; service or product quality lapses; fraud; failure to comply with regulations or company policies; shifting political landscapes; unanticipated inflation and exchange rate change, decline in customer buying habits, and a shrinking market (Bloom & Galloway, 1999). Business risks vary in their frequency, predictability, and severity of outcomes or losses. Risk mangers choose the risk management tool best suited to manage the risk. Business insurance is one of the main tools to mitigate and transfer risk.
Business insurance protects property, employees, customers, and business operations. Property insurance protects business properties. Unemployment insurance, workman's compensation insurance, health insurance, disability insurance, and key employee insurance protect employee interests. Liability insurance protects both business owners and customers. Business interruption insurance, key employee insurance, surety bonds, employment practices, and liability insurance protect business operations. Businesses choose their insurance based on their financial resources, risk philosophy or risk appetite, business goals and objectives, and perceived risks. Businesses engage in the following steps when choosing their business insurance. First, businesses assess what parts of the business require loss protection. Examples include equipment, inventory, buildings, liability, business interruption, business vehicles, and key employees. Second, businesses decide what level of coverage is required. Examples include total, fire, theft, catastrophe, accidents, and loss of income. Third, businesses decide which people related to your business you would like to insure. Examples include all employees, key employees, or customers. Fourth, businesses choose an insurance agent or broker and purchase one or multiple insurance policies. Ultimately, businesses purchase business insurance based on their needs, liabilities, risks, and resources as well as state and federal laws.
State governments oversee and regulate the business insurance industry. State regulation of business insurance focuses on rate regulation, disclosure, fair play, and compliance. Each state has an office, division, or department of insurance that is responsible for establishing their state rules and regulations by which the insurance industry must abide; that records and helps resolve consumer complaints; conducts insurer examinations; collects fees and administers licensing; and reviews insurance rates and products. State governments began creating separate departments of insurance oversight and regulation during the 1850s and 1860s. The federal government confirmed the power of state governments to regulate business insurance rates in 1945 with the passage of the McCarran-Ferguson Act. The McCarran-Ferguson Act (U.S. Code Title 15, Chapter 20) declares insurance to be interstate commerce and empowers the states to regulate the insurance business (Merkel, 1991).
The following section describes and analyzes the main types of business insurance including business owner's insurance policies, business liability, workers' compensation insurance, key employee life insurance, business disability insurance, marine insurance, business interruption insurance, computer insurance, business automobile insurance, and crop insurance. This section will serve as the foundation for later discussion of the issues associated with the use of business insurance as a risk management tool.
Types of Business Insurance
Businesses use insurance in three main areas of operations: Deferred compensation funding, buy-sell agreements, and corporate risk management. Deferred compensation refers to an arrangement in which a portion of an employee's income is paid out at a date after which that income is actually earned. Corporations use life insurance to fund deferred compensation arrangements for highly paid executives. In addition, companies use insurance to provide retirement income for employees while managing the tax consequences of the obligation. Insurance as a deferred compensation funding vehicle has cash-value. Cash-value insurance policies have numerous advantages: Tax-advantaged investment appreciation; option to withdraw part of the accrued cash value; and option to borrow against the accumulated cash value. Buy-sell agreements refer to an agreement used by businesses to sell the interests of a deceased owner to the remaining partners at a predetermined price or using a predetermined formula. Buy-sell agreements, also referred to as cross-purchase agreements, use business insurance to fund the purchase of the deceased owner's interest in the company. Buy-sell agreements often use business life insurance to fund the purchase of company shares. Corporate risk refers to risks associated with the unique circumstances of a particular company. Businesses use insurance to mitigate and reduce risk. Insurance protects company assets. Business risk management also includes insurance on the company's property (plant, equipment, vehicles) as well as insurance to protect the company in the event of product liability or other lawsuits. At some companies, it might also include health and disability insurance on employees.
There are multiple types of business insurance. Examples include business owner's insurance policies, business liability, workers' compensation insurance, key employee life insurance, business disability insurance, marine insurance, business interruption insurance, computer insurance, business automobile insurance, and crop insurance. Certain types of business insurance are used across businesses and industries while other types are industry specific. Small and medium sized businesses often choose to purchase a business insurance package, referred to as a business owner's policy, that combines coverage into one policy. The diverse ventures and scale of large corporations usually require multiple forms of insurance; sometimes from multiple insurers. In the event of loss, businesses insurance provides, as specified in the particular policy, either actual cash value or replacement value. The following descriptions define the most common forms of business insurance used by U.S. businesses (Anderson, 2001).
Business Owner's Insurance Policy
Business owner's insurance policies combine property and liability insurance together on one policy with one premium. The property coverage may include business buildings, computers, furnishings, phones, records, employee belongings, equipment, and inventory. The liability coverage...
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