Understanding the Risk

Whether a business, industry or an individual, all are subject to many forms and categories of risk each and every day. Everyone also faces the costs or potential costs associated with each risk, if and when the risk becomes an event that actually happens. Unfortunately, many do not give those risks due consideration.

Accidents happen all the time and when an accident happens causing damage or destruction to property or equipment there is a cost to repair or replace the damaged/destroyed property. Likewise, when an accident takes place causing bodily injury to others, there are costs that are very likely to be faced by the party who caused the accident.

Financing the cost of the accident can be easy if we have sufficient money of our own to pay for the damage or injury or if we are able to borrow the money from a financial institution, or elsewhere, but it can be devastating when we do not have sufficient money reserves or borrowing power.

Virtually all business, industry and individuals have an alternative manner in which they can finance the cost of risk.

They can transfer many types of risks through instruments most often referred to as insurance policies (which are contracts of indemnity).

Contracts of insurance (indemnity) with insurance companies are legal, binding written agreements that provide a measure of indemnification when an insured accident causing financial loss takes place, and unlike the unknown costs of an accident, the cost of transferring the cost through is known before the accident happens. It is the insurance premium cost.

Options for Paying Losses

Financing the cost of accidental losses can be managed through three basic choices:

  1. Funding/paying for the financial cost of the accident from your own resources (your bank account),
  2. Funding/paying for the financial cost of the accident by borrowing money to cover the payment of those costs.
  3. Transferring the risk of the cost of accidents to an outside entity/company, usually an insurance company, in exchange for a known financial loss which is the insurance premium cost.