The best story told about insurance is how it originated may centuries ago. Merchants traveling to a nearby market used to load their goods into boats and travel down-river to a nearby market. Unfortunately, dangerous water conditions often tipped the boats causing the merchants to lose all their possessions. Since this caused significant hardship for the merchants and their families, an alternative solution needed to be created.
The merchants decided if they spread their possessions among several boats traveling to the market, chances are most boats would make it and they wouldn't lose all their possessions. This model worked originally but unfortunately several conditions made it unfavorable over time, for example;
1. Some merchants didn't take good care of their boats and therefore were more likely to sink.
2. Newer merchants were inexperienced navigating the waters and tipped their boats more frequently.
3. Some merchants started stealing the goods of other merchants.
Eventually wealthy merchants decided a different alternative was needed. They then agreed to replace all the possessions of any given merchant for a small fee. With this model, every merchant would carry their own goods, in the event their boat tipped traveling through the dangerous waters, the wealthy merchants would pay to replace all their possessions. Of course, the merchants decided the following rules would apply;
1. Any merchant with a boat in poor condition would be charged extra for their journey
2. Newer merchants would be charged extra because they had less experience navigating the dangerous waters.
Of course, this story continues to evolve over many generations but you can get an idea of how insurance allows us to protect ourselves against the financial hardship of a loss.
Today insurance covers 100's possibilities. For example;
• Protecting you from financial loss when your home is damaged.
• Protecting your family against the financial loss of a critical illness or death.
• Protecting your business from the financial loss of damages, injury and interruption.
• Protecting yourself from the financial loss of lawsuits
• Protecting you from the financial loss of a car theft or accident.
Insurance works by "pooling" risk with others. This simply means a group of people want to protect against a loss or exposure that could cause financial hardship. Since the "pool" is so large, you can project what the actual losses will be for a loss or exposure "pool". It is obvious not all people in the pool will have a loss at the same time. This allows third parties (insurance companies) to profitably cover losses or new exposures as they may arise.
What do you think?
Why is the phone ringing?
This is one of the most important questions I ask anyone looking to purchase a business. There are several factors that will contribute to this answer but for now we are going to focus on risk management. To understand better we will look at a recent lawsuit Gestation F Lessard. v. Bourneville, where several defects had a negative impact on the purchase of a business.
What can we learn:
1. Avoid - In risk management, avoiding a risk can be the most effective strategy. Sometimes we need to take a step back and analyze things before making a commitment.
Solution: Ask a third party to analyze the business from an unbiased perspective. If you can’t gather all the information they need you are better off avoiding the risk than taking a chance.
2. Control - Terms and conditions can be a life saver when making any type of transaction. By controlling the risk, you are taking the necessary steps to reduce or prevent bad outcomes from happening
Solution: Consider a diligence review and subjectivities while doing a deal. This is something your legal council and business consultant can help with during the purchasing process
3.Retain - Part of owning a business is taking chances. Sometimes you will have exposures which you cannot avoid and you will need to accept that.
Solution: Understand what type of risks you are willing to and can afford to absorb. A good financial plan can help with planning for unexpected expenses.
What do you think?
What is the best way to handle risk? There are several factors to take into consideration for every situation, but multiple risk management practices should be used.
1. Risk Avoidance - The best way to not have an accident is to avoid them in the first place. Sometimes this alternative can seem the least attractive but ultimately be the most effective.
2. Loss Control - Loss reduction and prevention are the best way to control a risk. Loss reduction can be as simple as implementing safety rules. Loss prevention can be as simple as installing a security system to deter thieves.
3. Risk Retention - Retention involves absorbing part of a loss, regardless of whether its intentional or unintentional. If you insure a new toy for $10,000 and it is worth $20,000, you are prepared to absorb a $10,000 loss.
4. Risk Sharing - Transferring risk in order to shift the financial responsibility to another party. A non-insurance transfer would involve hold-harmless clauses and incorporating a business which reduces the chances of a potential loss.
5. Risk Transfer - One of the most common risk management techniques is to transfer risk through insurance. By paying a premium to an insurance company you look to be reimbursed in the event you encounter a loss.
The best risk management technique is one which has be designed to fit the risk tolerance of an individual or organization. Consult your insurance broker to help you determine a risk management strategy that suits your needs.
What do you think?
What is credit risk and why purchase such an insurance policy? When someone owes you a substantial amount of money you want to make sure you get paid. Credit Insurance provides guaranteed payment in the event you are unable to collect the money you deserve. Below are some key advantages:
1. Allows exporters to offer safe, open terms overseas
2. Opens financing options by securing the receivables
3. Empowers companies to confidently grow sales without credit concerns.
What do you think?
Signatures are import for the recognition and acceptance of documents. Unfortunately signatures were used before a time when technology controlled our daily lives. In theory an e-signature should verify electronic documents have been verified by the consumer. Unfortunately they don't actually serve the purpose they need to and It is our belief they will be quickly replaced by other technology.
In todays environment of e-signatures you can see adoption by a carrier, a contractor/broker system, and finally some sort of third party signature solution. Although all of these have their benefits the e-signature can easily and often be compromised or forged by parties with access to the same document. You hardly find someone who can sign the same on paper as they can with an e-signature.
The future of the signature is going to change with the advancement of technology. I believe Biometric Authentication is the future of the e-signature as nothing can replace the unique DNA of an individual. It will take some time before organizations will learn to accept alternative methods of signatures, but the inevitable is going to happen.
What do you think?
The Base Team
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