Operating even a small business without appropriate insurance can be its downfall, so it is wise to periodically evaluate your insurance needs and costs. Whether insurance is just part of your risk management plan or a benefit you offer employees, here are three types to consider.
Traditional insurance is when an entity signs a contract with the insurer and pays a fee in return for reimbursement if a loss is experienced. These plans cost a business a set amount and limit exposure, so it is predictable and helps maintain financial stability by assuring there will be compensation for losses. This type of insurance may be the only option for a very small business.
Instead of using a traditional insurer, a business can form its own insurance enterprise called a captive insurance company. This is a subsidiary company owned by its policyholders to insure its own risks. A pure captive insures only its owner or owners, but multiple businesses in the same industry can jointly form captives which are called group captives. Creating a captive can put your capital at risk because you must be able to pay claims and secure future losses, so this really only works for financially strong companies.
Another alternative to taking out third-party insurance is to create, manage, and bear the risk of your own insurance plan. With self-insurance, you designate a fund to handle claims and losses. This is different from captive insurance because it is simply a pool of money and not a separate company. Some businesses may only be able to self-insure for small, predictable losses and need to purchase traditional insurance for potentially large losses.
Insurance may not be the most glamorous aspect of running a business, but it is crucial and should be taken seriously. It is a good idea for every business owner to research and find a suitable type of insurance to invest in.