It is worthwhile for business corporations to have an insurance cover to protect them against costs arising from liability claims and property loss or damage. Businesses that do not have insurance coverage might be forced to pay costs for damages and legal claims if they materialize. If such costs are high, the company might become financially unstable, affecting most if not all of its operations. A business can choose from various types of insurance coverages depending on its needs and budget limit (Culp, 2002). The current essay covers conventional and ‘finite’/ ‘alternative’ risk insurance practices. It also shows that better enterprise risk management can be achieved through flexible and creative collaboration between corporate insureds and corporate insurers. Moreover, the paper addresses the importance and limitations of insurance-related enterprise risk control within the manufacturing industry.
In conventional insurance, an insurer pays (in return for the agreed premium) a policymaker a specific amount of money on the occurrence of a specified event (Dickson & Steele, 1984). The insurer and the policymaker must develop a contract stipulating the sum of money to be paid and the services to be rendered. The specified event must possess an uncertainty aspect, which may be although an event is more likely to happen, the timing of its occurrence is uncertain. Also, uncertainty may entail the occurrence of an event depending on accidental causes, making the event less likely to occur (Williams, et al., 1998). A conventional insurance contract comprises (i) the insurer and the insured (ii) an agreed premium (iii) the sum of money to be paid to cover specific losses (iv) losses specified in the insurer-insured contract must possess a remote chance of occurring, and (v) the insured entity must have interest in what is being insured, for instance, being the owner of the property they are insuring (Culp, 2002).
Other than conventional insurance, alternative risk transfer (ART) allows corporations to buy coverage and transfer risks without using traditional commercial insurance. The two main segments of ART are transferring risks through alternative products and transferring risks through alternative carriers (Banks, 2004). Risk transfer through alternative carriers involves looking for an organization, for instance, a captive insurer or pool, willing to take on some of the insurer’s risks for a fee. On the other hand, risk transfer through alternative products involves purchasing insurance policies, securities, or other financial products (Baur, et al., 1999).
Risk transfer through alternative carriers allows an organization to choose various alternative carriers to adjust the amount of risk in its portfolio, with the biggest portion being self-insurance. In self-insurance, an individual or a company allocates some of its money to pay for potential loss instead of buying insurance with other companies to reimburse them for the loss (Perez, 2002). In self-insurance, an individual who suffers the loss pays the costs and does not file a claim under the insurance policy. When it is companies, self-insurance often applies to health insurance (Blokdyk, 2018). For instance, employers who provide health or disability benefits to their employees may pay for claims from specific asset pools instead of through insurance companies. The employers avoid paying insurance premiums to third parties although retain the full risk of paying claims.
Most state insurance commissions regulate self-insurance, allowing companies to minimize costs and streamline the claim process. The insurer issues insurance coverages such as life insurance in the event of unforeseen occurrences. Some of the insurance coverages in self-insurance are physical damage, general and auto liabilities, and worker compensation (Blokdyk, 2018). Although various States regulate auto liability and worker compensation heavily, self-insurance in these two areas has continued to grow because self-insurance is often associated with more loss control and cost-efficiency (Blokdyk, 2018).
Risk transfer through an alternative carrier can also occur through risk-retention groups and captive insurance, common in large corporations. Businesses facing similar risks commonly use pool resources to provide insurance coverage. Pools are associated with groups of government entities banding together to cover particular risks. In most cases, pools are established to provide worker compensation coverage (Banks, 2004). Interest in pools persists because worker compensation is one of the troubled areas in insurance coverage.
Another essential segment in ART is risk transfer through alternative products. Some of the insurance products are available on ART, with most of them including insurance-connected securities, derivatives, and contingent capital associated with debt and bond issues because they involve bond issuance (Baur, et al., 1999). Proceeds from bond issue are invested to increase the money available to cover risks while bondholders receive interest. Also, risks of one or more companies may be bundled together through securitization and then selling the risk to investors willing to gain exposure to a specific risk class (Perez, 2002).
Elsewhere, better management of risks in large manufacturing corporations can be achieved through if corporate insurers and insureds flexibly and creatively work together. Corporate insureds are responsible for paying premiums to corporate insurers in exchange for protection on uncertain future occurrences. Also, corporate insureds should inform corporate insurers about events relevant to contingent risks transferred to them (Dickson & Steele, 1984). For example, they may inform an insurer how specific insurance policy applies to them and report incidences of damage emanating from the insured’s conduct. The insured may lose the insurance coverage for failure to disclose such information.
Further, it is the responsibility of corporate insureds to corporate with the corporate insurer to identify, investigate, and resolve events or circumstances leading to losses born by the insurer (Rejda & McNamara, 2017). Other duties of the corporate insured include avoiding concealing and misrepresenting information, informing relevant authorities about damage or loss, providing a claim notice to a corporate insurer, identifying the materialized damages or loss, and providing proof of them to the insurer (Dickson & Steele, 1984). The corporate insurer may cancel the coverage policy if the corporate insured does not comply with their duties or for failing to pay agreed premiums.
Besides corporate insured undertaking their duties to manage enterprise risks better, corporate insurers also have a role to play. A corporate insurer has to pay for the losses. A corporate insurer is responsible for compensating the insured for the suffered losses due to the covered risks (Harrington, 2003). For instance, suppose Mercy suffers a car accident due to her mistake. The corporate insurer may pay Mercy and the other driver for injuries and pay costs of damage to Mercy’s car and that of the other driver.
Further, the corporate insurer has a duty to defend. In general, insurers may defend or pay the legal expenses of an insured who faces a lawsuit for the covered risk (Dickson & Steele, 1984). For instance, suppose Mercy has professional liability coverage for her Engineering profession. An insurer may defend Mercy if she is sued in court for negligence in her Engineering services.
Additionally, a corporate insurer has a subrogation role to play. In subrogation, an insurance carrier acquires the right to legally pursue third parties that led an insured to incur an insurance loss (Rejda & McNamara, 2017). For example, suppose an insured party’s property is damaged through the fault of company A. The insurer will reimburse the covered insured based on the policy terms and then pursue legal action against company A. Based on the different duties and responsibilities of the insured and the insurer, better management of risks can be achieved through flexible and creative co-working between corporate insurers and corporate insureds.
In large manufacturing corporations, conventional insurance is important. Although every manufacturer hopes all its manufacturing activities to run smoothly, this is not always the case. The needs of manufacturing corporations are different across the industry. However, all large manufacturing corporations should have insurance covering their business property, general and professional liabilities, and business income. They can enroll in a single commercial insurance package that provides an efficient and economical alternative.
The benefit of insurance in the manufacturing industry is that it provides coverage to general commercial liability. Conventional insurance protects a manufacturer against lawsuits from allegations and actual claims for bodily and property damage arising from the corporation’s manufacturing activities and the products it creates (Dickson & Steele, 1984). Also, insurance helps the manufacturer to protect its manufacturing plants, contents, inventory, machinery, and tools (Rejda & McNamara, 2017). The large size of a manufacturer means that they will suffer the most in case of fire. Having insurance will cover costs of replacement and repair for the manufacturer’s fixed assets. Also, having insurance protects a manufacturer from lost income arising from property damage claims (Thoyts, 2010). For example, in the event of a fire, the manufacturer’s production may stop, resulting in income loss. A business income insurance coverage will help a manufacturing company avoid significant financial loss during downtime.
Additionally, insurance is important in covering the professional liability of corporations in the manufacturing industry (Rejda & McNamara, 2017). A manufacturer buys professional liability when it designs, sketches, or draws plans to rely on its manufacturing processes wholly. If these plans have an integral error, the manufacturer’s products will become unusable, resulting in a significant loss that can be offset by professional liability insurance coverage. The manufacturer should consider intellectual property coverage for its designs that are patented or pending patents to protect the company from legal costs associated with infringement or theft of intellectual property. The policies are unique, meaning that the manufacturer should understand what is covered in its specific policy. If the manufacturer has proprietary or confidential customer information on-site, or exchanges ideas online, it should include data breach and cyber liability in its insurance coverage.
Further, insurance practices cover manufacturers on worker’s compensation and environmental liability (Rejda & McNamara, 2017). Manufacturing is more dangerous than other industries. For instance, manufacturers operate massive printing, lathes, and various machines that carry significant risk. Even if the manufacturing processes are fully automated, people will be needed to service them. Having insurance will provide worker compensation coverage to cover medical expenses and rehabilitative care resulting from workplace injuries. Other than manufacturers having general liability coverage, they can have environmental liability coverage to cover costs related to contamination and clean-ups arising from equipment failure that could leach harmful chemicals into the environment (Harrington, 2003).
The limitation of conventional insurance industry products is that they pay slowly or even deny claims. Considering that business insurance has several coverage policies, the company might not know if specific claims are covered. Also, insurers may take a long time to assess the damage of a claim and determine an appropriate amount to compensate the insured (Dickson & Steele, 1984). The longer assessment time may be unfavorable and frustrating for the claimant enterprise, leading it to seek other options. A company needs an experienced business insurance professional to create a coverage portfolio according to the company’s needs and budget. Suppose a business needs $60,000 to replace all its property while the policy property limits are $30,000. In such a case, the company will be underinsured.
The other limitation of conventional insurance is that it adds expenses to a company. Regardless of the industry, every company examines its budgets, aiming to reduce expenses. Manufacturers might find insurance costly, especially due to the high number of injuries in the manufacturing industry, leading to increased worker’s compensation (Rejda & McNamara, 2017). Companies operating in the manufacturing industry are likely to pay more for their insurance policies than companies in the accounting industry. When the manufacturer is large, it should have policies covering a wide range of needs to ensure complete coverage of the loss to avoid being underinsured.
Besides conventional insurance, alternative risk transfer (ART) insurance is essential for controlling risks for large manufacturing corporations. For example, having self-insurance will allow corporations to create a system of recording their losses and paying for them. While self-insurance is an informal risk-controlling technique and involves more risk retention, it can allow a company to maintain cash flow benefits by paying with its liquid assets or cash flow (Banks, 2004). As a result, the company may save money it could have spent on premiums. A manufacturing corporation may also offset some risks it assumes by buying excess coverage policy for sporadic but severe losses. Self-insurance also allows a manufacturer to finance losses instead of filing a claim with an insurer, helping a manufacturer to improve its efficiency (Blokdyk, 2018). Also, self-insurance will help the manufacturer control the claims process and be not subject to policy conditions and exclusions, leading to improved flexibility.
Another insurance-related practice in ART that can benefit manufacturing corporations is captives that insure the exposures to parent companies. A group or a single parent may own the captives (Blokdyk, 2018). For example, several manufacturers may work together to own group captives to share exposures and financial costs. A single manufacturer may also operate the captives as a formal retention plan to cover its exposures and those of its affiliates. Also, a captive can mitigate exposures through various insurers or reinsurance. Having captives will enable a manufacturing corporation to insure its exposures rather than using conventional insurance because of the dangerous nature of the manufacturing industry (Culp, 2002). Also, like self-insurance, captives are not subject to policy conditions and exposures, allowing broader coverage of exposures. Moreover, large manufacturers can domicile captives worldwide by using jurisdictions with no or minimal taxes to capitalize on favorable regulations (Blokdyk, 2018). The challenge of captives is that they require high capital requirements and start-up costs, which might not be a problem for large corporations. Depending on the jurisdiction, a captive may be required to maintain a higher capital requirement, for example, over one million dollars. Small corporations without adequate capital to start a captive can meet such requirements through a line of credit. However, depending on where the captive is domiciled, the line of credit might or might not be enough to meet capital requirements.
Moreover, ART insurance such as retrospective rating plans (RRP) can help manufacturers deal with worker compensation. The National Council on Compensation Insurance developed RRP for worker compensation and the insurance service office for other coverages (Blokdyk, 2018). RRPs integrate insurance programs with risk retention, allowing premium adjustments to reflect the company’s losses, differentiating them from other guaranteed cost insurances. Using RRP can benefit a manufacturer by enabling it to use its losses from its policy period to set pricing rather than relying on industry loss experience. At the start of a policy period, the manufacturer can pay a premium deposit to an insurer, and at the end of the policy period, depending on loss occurrences within the policy period, prompting increasing or reducing the premium (Baur, et al., 1999). The adjusted premium falls within the highest and lowest values in the policy. This can help a manufacturer implement risk management strategy to ensure effective mitigation of its losses and damages. The manufacturer may also save more on premium than guaranteed cost insurance by keeping its losses low.
Further, reinsurance in ART can provide a protection layer to corporations against catastrophic losses. In reinsurance, an insurer transfers risks to another reinsurer. An insurer may transfer all or some of its exposures covered in an insurer’s policy, including several policies, one policy, or a single line of business (Carter, 1983). The reinsurer and the insurer sign a reinsurance agreement stipulating terms for covered losses. An insurer often does not transfer all liabilities to the reinsurer. Instead, an insurer retains a specific proportion of its insurance amount or dollar amount of loss (Carter, 1983). Insurers and insured corporations can both benefit from reinsurance, protecting an insurer against natural catastrophes, providing additional relief to an insurer, and increasing property coverage or liability line capacity.
Finally, large manufacturing corporations can benefit from cat bonds, insurance-related security transferring risks to investors. Cat bonds were created as a response to a powerful and destructive 1992 Hurricane Andrew to diversify capital availability (Blokdyk, 2018). Large manufacturing corporations and reinsurers can reap the benefits of cat bonds to serve as a gap between reinsurance and conventional excess insurance. Cat bonds can be used for all insurable catastrophes, including fires, hurricanes, earthquakes, and other adverse environmental events. Also, cat bond coverages can be based on one event or cumulative losses over a specific period (Perez, 2002). A corporation can use a suitable metric to measure losses such as the hurricane category, actual losses, or industry loss index. Cat bonds will protect manufacturing corporations against uncommon but severe events to ensure that the insured and its investors do not lose money.
While ART insurance may provide essential risk-controlling methods through a manufacturing corporation’s enterprise risk management programs, they have limitations. Corporations might experience inertia considering to implement ART to manage their risks. If a corporation has previously succeeded in managing its risks through conventional insurance, it might maintain its existing coverage and avoid shifting to ART (Blokdyk, 2018). This unwillingness coupled with a lack of past data to show the importance of ART in a corporation may generate stereotyped stigma, categorizing ART as an unpredictable and untested risk management technique. However, the skepticism of corporations and risk managers about ART is justifiable. As alternative risk transfer is not adequately refined and experienced, this raises chances for overprotecting or under-protecting enterprise risks (Banks, 2004). Yet, the biggest reason corporations do not have ART is that such a risk management technique often requires complete culture restructuring. Everybody in the corporation must adapt to view risks from different perspectives and adjust corporate risk analysis and calculation methodologies.
In conclusion, while business insurance requirements vary by industry, manufacturing corporations at least need an insurance plan covering their commercial properties, business income, and general and professional liabilities. The disadvantage of insurance is that it pays slowly or even denies claims apart from adding expenses to corporations aiming to save money. Elsewhere, the manufacturing corporation can use ART insurance such as self-insurance, captives, retrospective rating plans, reinsurance, and cat bonds to spread risks more broadly, thereby increasing risk-bearing capacity. However, ART is not free of weaknesses because it might require a complete foundation-to-roof restructuring of culture for corporations previously using conventional insurance. Whether a large manufacturing corporation uses traditional or ART coverage, it should have at least an insurance program because manufacturing is the most dangerous industry to operate.
Reference List
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