FINANCIAL INSURANCE
Financial insurance as an instrument for businesses to transfer the operational and financial risks they are exposed to
Efforts aimed at optimising business processes have necessitated dealing with "risk technology", i.e. professional prevention against losses resulting from various risks. Risk management is a term describing the process of consciously diagnosing and controlling risk. This process is intended, above all, to reduce operational risk by reducing or even completely eliminating the adverse effects of certain risk-carrying events.
Risk identification is the key stage in the risk management process. At this stage of the process, the risk-carrying events that the business concerned is exposed to should be identified. It is important to identify the most significant potential losses that the business may suffer as part of its operations, affecting all or a substantial part of its assets, including tangible assets, personnel, technology expertise, customers or image. As the types and values of such assets are different at different businesses, risk identification should be performed individually at each business.
Once a risk is identified, it is estimated and measured. The scale of the risk may be determined by identifying the extent of possible loss or damage and the frequency of its occurrence. Precise determination of the likelihood of a particular event occurring and of the financial consequences of the event is a difficult task. This, however, can be done based on statistical data or estimates.
The next stage in the risk management process is risk control. This stage covers the techniques, tools, strategies and processes that help avoid or reduce the identified risk (i.e. physical risk control) and retain or transfer the risk (i.e. financial risk control). Risk reduction involves taking preventive measures, i.e. measures aimed at reducing the number of possible losses or eliminating such losses completely, and at reducing the potential scale of the loss(es).
In taking strategic and day-to-day business decisions, it is natural for decision-makers to work to achieve a state of certainty. The negative consequences of random events that can be caused by both natural forces and human activity have, for a long time, forced business owners to seek ways to protect their businesses against such events and their consequences. Hence the need to provide an instrument that would help businesses deal with financial consequences of such random events. This instrument is an insurance that allows the business owner to distribute the burden of dealing with the consequences of such events across a number of business units exposed to such events. In this sense, insurance neutralises the risk of a business requiring financing as a result of certain random events occurring. Each business unit exposed to a particular event may satisfy its requirement for financing as a result of that event, but is also obligated to participate in satisfying such requirements on the part of the other business units covered by the insurance alongside that business unit.
The role of business insurance in business operations
By taking out insurance, a business transfers the risk of expenses, which provides it with greater business certainty. It is important for both small and large businesses, because insurance helps them concentrate on their core business activities. By transferring risk under insurance arrangements, they no longer need to worry that their business activities will not produce the desired effect as a result of the insured risk (e.g. the risk of fire) materialising. In addition, by eliminating the need to freeze capital to cover such potential losses, insurance helps businesses invest on a large scale, show greater boldness in undertaking innovative investment projects and implement inventions; to put it briefly, insurance helps businesses develop comprehensively. Having a sense of financial security resulting from their insurance contracts, businesses are also more willing to take risky decisions. This sense of security may be additionally reinforced by the insurance company's professional approach and its good financial standing.