Commercial risks insurance.
Entrepreneur activities and insurance are two closely interconnected categories of the market economy.
The main aim of entrepreneur activities is getting profit, increasing capital invested into business. That is why insurance against possible loss of expected profit or unearned profit becomes very important.
The object of insurance is the commercial activities of the insurer, that stipulate monetary and other investments into some kind of production, works or services and getting profits from these investments within a definite period of time.
The liability of the insurance company on insuring the risks is to reimburse the insurer the losses suffered due to unfavourable, unpredictable changes of current market situation and worsening of other terms and conditions for performing commercial activities.
The insurance sum is defined by two ways:
the insurance sum is established within the limits of insurer’s capital investments into insuring operations;
the insurance sum includes not only capital expenses but definite profits being expected from them.
In the first case insurer’s expenses are reimbursed; it may be called insurance of investments. As to the second one, both expenses and standard profits are reimbursed, that’s why it may be called the insurance of return (profit).
The purpose of insurance is to reimburse possible losses to the insurer if the insured operations don’t return the stipulated payback. The insurance reimbursement is defined as difference between insurance sum and real financial results of the insured commercial activities.
As the main aim of insurance is protection against possible losses of investment sums, the period of insurance contract is stipulated by the period of payback of capital input. The insurer seeking to quicker payback of entrepreneur activities, is, in fact, interested in the reduction of the period of insurance. For the insurance company a short period of insurance contract increases the risk of unjustified reimbursement repayment. The increase of this period makes the payback more real thus reducing the possibility of the appearance of losses subject to reimbursement, though there may appear some other factors as well.
The peculiarity of insurance under consideration is that the repayment of reimbursement is effected in general, at the end of the period of insurance when the final results of insured commercial activities have been cleared up. As to other types of insurance the necessity of losses compensation may appear at any moment of insurance contract period. The stipulation of the period of possible repayments under commercial risks insurance leads to use insurance in a planned manner and creates conditions for collecting reserves by this period.
The character of insurance determines a number of definite requirements for contracts to be concluded. The insurer should have releases, licences, patents for given activities and all other required documents. While filling in the insurance application form he is obliged to give as full as possible information: about forthcoming commercial activities, the expected returns and expenses associated with them, concluded contracts, and all circumstances helping to consider the degree of a risk.
Some losses are excluded from the insurance liability. They are: losses due to war or military actions, state authorities’ decisions and political upheavals, exchange rate changes, banking refusal to credit an enterprise being set up, legislation infringement, changing of the type of commercial enterprise, unskilled management.
Insurance should be carried out only by stating minimum deductible (e.g. 5%). And it should also give the insurer the right to increase deductible rate. The restriction of minimum sum of reimbursement (e.g. 80% of the loss) is also worthwhile.
Premium rates depend on many factors: the kind of activities, the period of insurance, the degree of market relations’ stability, etc.
Insurance against losses due to production interruptions.
Insurance against forced idleness is, in its essence, an addition to the insurance of fixed and working capital as interruption in production is caused by their loss or damage.
It is advisable to include into insurance liability losses due to nondelivery of electric power, fuel, water because of accidents which did not happen at the insurer’s but at the supplier’s, on transmission lines, etc.
The essential peculiarity of insurance against production idleness is that the damage rate depends on the period of production idleness. So it is very important to define the length of underwriter’s liability, i.e. the period of time within which he is obliged to reimburse losses against idleness. The period of such liability most often experienced in the world practice is up to one year.
The terms of insurance against idleness stipulate, as a rule, the determination of definite limits with which the underwriter’s liability begins. Such limit may be either deductible in monetary expression or the period of idleness. And the insurer has the right to receive insurance reimbursement when this period is exceeded, for example, when the idleness lasts more than 5 days.
Damage due to idleness subject to reimbursement is added up from expenses arose within production stop, unearned profit, additional expenses being effected for the purpose of damage reduction. As the second part prevails they often say about insurance against loss of profit.
Expenses effected within the period of production stop include those current expenses of an insurer which he is forced to make irrespective of the fact whether the production process continues or is stopped.
Profit being unreserved within the production stop may be counted by multiplying the volume of unreserved products within the idle time by the profit rate per unit of produce.
The amount of additional expenditures connected with the reduction of losses due to idle time should be defined on the basis of records. They may be connected with the introduction of additional shifts, overtime works, urgent repair, the use of less intensive machines and processes, etc. The necessary condition of reimbursement of such expenses is the following – their amount shouldn’t exceed the sum of damage under other clauses.
In order to make the insurers interested in avoiding idleness and making steps to reduce losses one should reimburse only part of damage suffered by insurers, the rest of it is left on the insurer’s liability.
Together with general limits of liability under given insurance there should be excluded from reimbursement additional damage caused by production stop due to the change of initial project of reconstruction of damaged objects, planned repair, the authorities’ prohibition to carry out reconstructing works, the insurer’s lack of material, labour and financial resources necessary for removing the causes of idle time.
Payment rates are established in percentage to the cost of manufacturing gross produce.
The insurance of new technique and technology risks
The insurance of risks associated with introduction of new technique and technology can be divided into two directions:
The insurance of machinery, installations, technological lines themselves in case of their breakdown, destruction. In this case the protection against direct losses in insured objects is stipulated.
The insurance against unexpected unfavourable consequences caused by introduction of technical and technological innovations or their destruction. Hence indirect losses in the form of additional expenses and unreserved profit happen here.
Machines, technical and technological installations, which are considered to be suitable for operation after inspection and trial testing are the objects of insurance. As high valuable objects are subject to insurance, as a rule their full list with the indication of their characteristics is made up.
The insurance of new technique and technology is carried on against risks associated with their use.
These are the following risks:
errors in machines’ design and technology elaboration;
errors in materials selection and in manufacturing;
unexpected appearance of more sophisticated technique and technology on the market;
hidden defects which can’t be revealed during testing;
the operation stop of measuring, regulating and precautionary devices;
increased tension and pressure, short circuit;
errors in servicing the techniques and technological line;
carelessness, evil intent of separate persons;
other causes leading to machine destruction and production stop.
Losses are subject to reimbursement if they appeared due to accidental error or premeditated actions of persons, who were professionally trained for the operation with new technique or technology. If unskilled employees are allowed to run the modern technical (technological) installations then the appearance of losses mustn’t be regarded as premeditated ones and they are not subject to reimbursement.
The insurance against technical and technological risks doesn’t stipulate the coverage of losses against military actions, strikes, confiscation of property, fires, explosions, calamities.
Political risks insurance.
As a rule political risks are divided into:
the risk of nationalisation or expropriation without adequate compensation;
transfer risk associated with probable limitations for local currency convertibility.
The nationalisation risk is interpreted rather widely by businessmen – from ordinary expropriation to forced redemption of company’s property by authorities or simply restriction of investors’ access to the running of company’s assets.
Businessmen consider as political risks the risks of alterations of taxation policy, the prohibition for using credit cards, etc.
The transfer risk is associated with the convertibility of local currency into foreign one. For example an enterprise runs well, earns profit, has local currency but the firm can’t convert it into the investor’s currency in order to repay, say, the credit. There may be a lot of situations here, e.g. a forced long expectation to convert currency.
One should remember that alteration of exchange rate is not considered the insurance against transfer risk. One of the transfer risks is the risk of difficulties concerning the repatriation of profit.
The risk of termination of the contract stipulates situations when neither penalty sanctions stipulated by the contract nor arbitration help, i.e. the contract is terminated through no causes depending on the partner, e.g. in connection with the alteration of national legislation.
Export credits insurance
Under present conditions export credits insurance or the insurance against non-payment risks are of great importance in foreign economic relations. It means the insurance company guarantees the creditor due payment of goods deliveries, equipment or services rendered by him on credit. As a rule the volume of underwriter’s liability excludes the cases of non-payment or delay in payment if they happen due to the following causes:
delivery or rendered service was done with infringement of the terms and conditions of the contract;
the terms and conditions of the contract of sale or service rendering don’t conform to the legislative or other requirements of the country of a shipper, buyer or transit;
the lack of set of a shipping documents;
the payment is not effected or can’t be effected due to reasons depending on the exporter country;
goods are not accepted or accepted and given back .
The exchange rate difference, interests for failing payments causing from contractual liabilities, the sum of penalty and other similar expenses are not considered as a risk.
The important condition of insurance contract of export credits is the so-called period of expectation of payment. Under this condition the underwriter’s liability doesn’t happen immediately after the payment has been effected within stipulated period of time but after expiring of a definite period. As a rule it is 60 – 90 days. This period is necessary in order to clear up the causes of non-payment and to take steps for their elimination.
Export credits insurance abroad is exercised by specialised companies usually belonging to the state or the state has the control block of shares in them. In Great Britain the insurance of such risks is exercised by governmental Department of Export Credits Guarantee, “Lloyd’s” corporation, in Germany – the company “Germes”, in France – the company “Caface”. It should be born in mind that the companies carrying out export credit insurance have at their disposal a bank of data of the majority of world export – import firms. It contains characteristics of their financial situation and soundness.