What Is Financial Insurance?

rope lock. the climbing insurance. image by Ivan Hafizov from Fotolia.com

If you’ve ever taken out a loan, you’ve probably paid insurance on the loan, which is to help cover payments during a prolonged illness or unemployment. Businesses do this as well, with far higher stakes to protect in much broader circumstances. Finance insurance can protect the policyholder from losses if their partners don’t deliver their contractual obligations, but it can also protect against financial losses incurred through other kinds of situations.

TL;DR (Too Long; Didn't Read)

Financial insurance is used by companies to try to protect themselves from financial risks. They buy insurance to help cover stock market losses, protect against investor insolvency and so on.

Insurance: Meaning

A person or organization purchases an insurance policy. This makes them the policyholder. The policy will be worth a designated amount and is used as protection against risk of some kind. Fire insurance protects the policyholder from losses in case of fire, for example. Businesses use all kinds of insurance in order to protect themselves, including policies designed to protect their financial commitments.

What Are Financial Risks?

Any time a company extends credit, invests, expands, spends on capital or increases its costs, they’re taking a risk with their cash flow. There are instances that can be covered by insurance and there are those that cannot. Some businesses take out insurance on credit they extend consumers, others require insurance to protect against expanding operations overseas in dodgy territories.

Financial risks can be operational, informational, strategic, regulatory or even personnel-related. Risk management is when parties seek to limit their exposure if things go badly. The insurance industry in part defines risk as the possibility that losses and/or adverse events might interfere with an organization’s ability to meet its objectives. In the business world, these are often financial obligations corporations and organizations may have, and the insurance is taken out to protect them and financially cover them to some extent, should some sort of loss occur that prevents them from meeting those obligations.

Financial insurance may be taken out in the instance of, say, a building coalition that is erecting a new skyscraper. They may take insurance out in case one of the partners going bankrupt before construction has completed, ensuring they’ll be able to meet the deadline one way or the other.

This insurance may be stipulated by the landowners as a condition for accepting the project, as these sorts of policies are clearly a considerable expense — but erecting a building and having faith in the contractors over a two-year build is a considerable risk, too. More commonly, finance insurance covers things like currency fluctuation losses and rising costs of raw materials that can jeopardize a project.

Understanding Premium Finance Corporations

Such large policies are why premium financing companies exist. Instead of paying out the huge policy up front, the cost of which is called the premium, a financing company is engaged to pay out the premium in full and the policyholder then pays the installments for the financing instead.

Underpinning the Economy

Daily, corporations around the world take huge risks — whether it’s sailing their freighter full of cargo past a coast known to have pirates or it’s buying all the materials in advance for a risky and costly project. Insurance on such financial risks is meant to protect both the companies and the economy. By making it possible for companies to gamble on calculated risks, the economic engine keeps on rolling.

References

About the Author

Steffani Cameron is a professional writer who has written for the Washington Post, Culture, Yahoo!, Canadian Traveller, and many other platforms. Some writing projects have included ghost-writing for CEOs and doing strategy white papers. She frequently writes for corporate clients representing Fortune 500 brands on subjects that include marketing, business, and social media trends.

Photo Credits

  • rope lock. the climbing insurance. image by Ivan Hafizov from Fotolia.com