You should undertake a review to determine the acceptable level of loss your business is willing to tolerate. This review should include everything from the possible loss of your business property (for example, due to a fire) to your general liability (as a result of someone slipping on your floor). One recommended method of doing this involves three steps:
- Identify potential losses: Examine every step involved in your day-to-day operations; consider any key people, specific items needed to accomplish tasks, and other necessary elements such as power, etc.
- Determine acceptable level of risk: This is usually done in terms of dollars, although it could be in down time, sick days, etc.
- Identify alternatives by prioritizing and categorizing risks: To do this, you will need to project the frequency and severity of potential losses and identify alternatives to minimize the impact on your overall business goals.
The following risk categorization model can be used to help you determine your alternatives.
|If Loss Is:||Example||Action|
|Very large and highly improbable||Earthquake insurance for a home where there are no homes being destroyed by an earthquake.||Retain the risk (no earthquake insurance)
|Very small and almost certain||Minor damage to your auto
||Retain and reduce the risk (get a higher deductible and drive defensively)|
|Small or improbable||Theft of cash from wallet while getting coffee at the office||Retain and reduce the risk (lock wallet in desk)|
|Large and probable||Your death||Insure the risk (life insurance)|
|Very large and almost certain||Hazardous hobby
||Avoid hazardous activity
As you can see, insurance is generally needed to protect against severe losses. In the other instances, you can take other actions to either avoid (where losses are so frequent and severe that they cannot be tolerated), retain (where losses occur infrequently or are minor and are considered part of the cost of doing business), or reduce the risk (where you can use loss prevention measures such as mirrors, closed circuit televisions, etc.).
Take action to implement and monitor solutions: use the above model to help you choose alternatives; then track your losses over a period of time. Go back and reevaluate. If your level of losses is still too high, then you will have to go back through the prioritizing process.
Once you have determined what risks you will have to cover with insurance, your financial professional should be able to help you decide how much coverage you need. Of course your decision will be influenced by the cost of the insurance and the amount of money you have available to spend on insurance.