Running a business of any kind involves a certain amount of risk. There is a risk that your premises will be damaged in a fire. There is a risk that one of your employees will trip and have an accident. There is a risk that the goods you export will be left stuck on a dockside somewhere due to a dock workers’ strike.
Should any of these risks happen, they will have a financial impact on your business and they could have wider implications. Take a factory fire for instance. Not only would there be the cost of repairing any damage done by the fire, but what has happened to your orders while the repairs were being made? Perhaps one of your competitors has taken advantage of the situation and stolen some of your regular customers.
Risks are inevitable but they are also manageable. Any business owner takes steps to manage the impact of a risk. In the example of fire risk, this means installing smoke alarms and sprinkler systems as well as training staff to spot and prevent fire hazards.
Business owners will also look to reduce the financial consequences of a risk happening, and this is where insurance comes in. A good insurance policy will cover the business for many of the costs they have to meet as a result of the risk occurring. In effect, the business is looking to ‘transfer’ the risk away from themselves and onto someone else for the payment of a fee.
And the need to transfer risk is not only relevant to businesses. It is also relevant to individuals. For example, as individuals, there is a risk that we may damage our cars in an accident. There is also a risk that we will become unwell and need medical treatment or that our houses will get damaged in a storm. Of course, we hope these things will never happen and, fortunately, most of the time it never does. But when things go wrong it can be expensive and so for many of these eventualities insurance is there to take the financial risk on our behalf.
This transfer of risk is the basis of all insurance, and is something that Lloyd’s has been doing for more than 300 years.
