BIPL - Cost/Benefit Analysis of Insurance Lesson

Cost/Benefit Analysis of Insurance

Before we begin looking at cost-benefit analysis (CBA), let's review some standards for good risk management practices.

You can purchase business insurance for nearly every operation and risk your business faces. In fact, with so many options available, it is hard to determine what type of coverage you need. As a business owner, especially in the beginning or when funds are tight, you will have to weigh the cost of insurance against the benefits derived should you have to collect.

Think back to the risk management strategies we discussed in the last unit. If you recall, the time to transfer risk (buy insurance) is when the likelihood of an event happening was low, but should the event happen the adverse effect on the business would be severe. When it is not cost-efficient for a business to transfer the risk, then it is up to the business owner to put policies in place that would serve to either reduce or avoid the risk. For example, rather than buy surety insurance to protect the business against a bookkeeper who is a thief, certain accounting controls could be put in place that would catch the problem before it went too far.

Legal and Contractual Requirements for Business Insurance

Businesses not only carry insurance to protect themselves from loss but also because the law or certain contracts require it. Under Georgia law, businesses are required to carry two types of insurance: automobile liability insurance and workmen's compensation insurance. All automobiles, whether owned by individuals or businesses, must carry liability insurance in Georgia. Also, Georgia law requires all employers of three (3) or more full or part-time employees to carry workers' compensation coverage. While not required by state law, certain licenses, registrations, and permits required by federal, state, and local governments also have insurance requirements associated with them. For instance, an electrician's license might require that the electrician carry liability insurance.

Some contractual relationships also require a business to carry certain types of insurance. Banks and lenders might require a business owner to carry property and casualty insurance. A landlord might require his business tenant to carry liability insurance.

Self-Assessment - Cost/Benefit Analysis

 IMAGES CREATED BY GAVS