Financial risk insurance protects the business from unforeseen damage. For example, when a transaction for a real estate purchase was declared invalid by the court due to a notary’s mistake. Or, by their actions, a company or a private entrepreneur unintentionally harmed customers, the state, or others.
In this case, the insurance company will undertake compensation for damage, the enterprise or individual entrepreneur will not have to spend their money.
To get this protection, it is enough to choose a policy and conclude an agreement. We will tell you how to choose the right insurance program for you.
Financial risk is the likelihood of loss of enterprise funds.
Any insurance is protection against financial risks and not any other. For example, comprehensive insurance does not guarantee that a car will not be damaged in a road accident. After an accident, the car will still have to be restored, and if people are injured through the driver’s fault, they will have to pay for treatment. And the insurance company assumes these risks.
Property and financial protection are separated into a separate product pool. Business always runs the risk of losing money. For example, partners and counterparties may not fulfill their obligations, the market situation will change, the office will be robbed, and the specialist who draws up the deal will make a mistake – insurance of financial risks is just about such situations.
The product is used by legal entities: manufacturing and trade enterprises, service sector representatives, and financial organizations.
Voluntary types of financial risk insurance are selected individually.
It is worth choosing the type of voluntary insurance depending on the scope of work and the company’s current needs. For example, this risk can be insured if an organization starts working with a new counterparty and fears that it will not fulfill obligations.
Insurance of transactions (contracts)
One of the most popular types of financial risk insurance for small businesses. An enterprise can protect itself from losses as a result of:
- the bankruptcy of the counterparty;
- failure to fulfill obligations under the contract.
The first risk is triggered if the counterparty has not fulfilled its obligations and the court declares it bankrupt. The insured amount is indicated in the contract, which corresponds to the obligations of the counterparty.
Lost profits insurance
This type of insurance protects against financial losses associated with temporary interruption of work due to an accident, fire, interruptions in the supply of raw materials, and other circumstances.
A fire has occurred in the production area, and the flames damage the equipment. The company will have to spend money on repairing the workshop and purchasing new machines. During the renovation, the company suffers losses due to production interruptions.
Partial financial protection is provided by lost profits insurance. It is important to know the features:
- Usually, the lost profits are formalized within the framework of comprehensive insurance. That is, the company needs to insure property, liability, and other risks. The amount of such an agreement is quite high;
- insurance rates for lost profits are several times or even an order of magnitude higher than rates for property insurance;
- The insurance company will pay compensation if the profit is lost due to reasons beyond the company’s control.
In the event of an insured event, you will have to document the amount of damage. If the company did not produce products for 10 days due to repairs after the accident, you would have to provide accounting documents that will help to calculate the lost profit for this period.
The amount of the payment cannot exceed the amount of the actual damage. For example, if a company has moved the surviving machines to a reserve workshop and partially started production, this will be considered when calculating the payment.