All businesses are at risk of being thrust into “survival mode.” This could be because of accidents, financial loss, reputational damage, criminal activity, lawsuits, and so on. These are all examples of commercial risk.
Since the term “commercial risks” is broad, “commercial risk insurance” is also equally expansive. There is a specific type of commercial insurance for each kind of commercial risk. Commercial risk insurance, as part of your risk management strategy, will pave the way towards a successful and secure future for your business.
In this guide, we cover various examples of commercial risk, the role of commercial risk insurance, and other helpful tips.
Let’s get started!
What Is a Commercial Risk?
Commercial risk or business risk is a term used to encompass various perils that can get in the way of a business’s success. If not dealt with properly, these commercial risks can also cause a business to be in the red or to go under. This is why proper risk management is essential.
A few examples of commercial risk include the following:
- Economic risks - tied to the fluctuation of the economic landscape.
- Compliance risks - involves penalties and fines because of failure to comply with regulations.
- Security risks - refers to data breaches, fraud, and other types of criminal activity.
- Reputation risks - pertains to a reputation crisis due to a customer’s negative experience with your business.
- Operational risks - includes accidents, natural disasters, and other unforseen events that halt your business operations.
- Competitive risks - the danger of competition getting a majority of the market share, causing the business to lose revenue.
In some cases, these risks can overlap. As an example, a data breach (a security risk) can cause your customers to lose trust in your company (a reputation risk).
Another example is if an accident occurs (an operational risk) and your company was investigated and found to be uncompliant with safety regulations (a compliance risk).
What Is Risk Management and Commercial Risk Insurance?
It’s likely that commercial risks cannot be eliminated entirely. For this reason, one of the most widely accepted models of risk management involves four different approaches toward identified risks:
- Risk Acceptance - the risk is accepted and no further action will be taken towards it.
- Risk Transference - the risk is transferred to another entity. The most common way to do this is to get an appropriate type of commercial risk insurance.
- Risk Avoidance - the risk is avoided by also avoiding a step or action that brings the risk with it.
- Risk Reduction - through extra steps or actions, the risk is significantly reduced.
In many cases, businesses choose what approach to take with their commercial risks. For example, nowadays, reputation crises can spread like wildfire on social media. Therefore, most businesses are vulnerable to reputation risks, regardless of whether they have a social media presence or not. In such a situation, a business can choose to:
- Accept the risk by not taking any measures.
- Reduce this risk by (1) having better quality control for products or (2) having a playbook for a PR/social media crisis.
In other cases, there are only predetermined options for approaching a commercial risk. This occurs because not all risks are insurable. For such perils, the option to transfer the risk may then be limited or completely unavailable.
Examples of Commercial Risks That Insurance Cannot Address Directly
1. Economic Risks
A few examples of commercial risks under the economic category include changing interest rates, recession, inflation, taxes, and so on. These massive changes are typically not included in commercial risk insurance.
2. Compliance Risks
All kinds of businesses are subject to different rules and regulations, depending on their industry. Most of the time, noncompliance leads to fines and penalties because such actions are against the law. Therefore, there is no type of commercial risk insurance that addresses compliance risks.
The closest type of commercial risk insurance that can transfer this risk is what’s known as professional liability insurance or professional indemnity insurance. However, only unintentional acts of errors, omissions, and negligence are covered by this insurance type. Therefore, compliance risks are still in the grey area when it comes to professional liability insurance.
At the end of the day, the best way to approach compliance risks is to reduce them. This can be done by staying updated on regulations, regularly assessing your business’s operations for compliance, and/or hiring a consultant for the job.
3. Competitive Risks
This is one of the examples of commercial risks that cannot be insured. The most effective approach to this risk is to reduce it. A careful and consistent review of your business’s strategy, optimizing your business model, and most importantly, acting on customer feedback can go a long way in reducing this risk.
Examples of Commercial Risks that Have an Insurance Solution
1. Reputational Risks
In many situations, a business’s reputation has no commercial risk insurance to directly protect it. However, if your company’s reputational damage stems from a cybercrime incident (e.g. a data breach), some cyber liability insurance plans will reimburse the lost profit from this event.
2. Security Risks
There are a number of commercial risk insurance types that cover security risks. One example is cyber liability insurance, which protects businesses from all kinds of cybercrime.
Another example is crime insurance or fidelity insurance which protects against incidents of theft, embezzlement, forgery, or fraud.
3. Operational Risks
The right type of insurance can help keep your operations going, even in the face of vehicular accidents, equipment breakdown, damage to tools and materials, and so on. Commercial risk insurance can also guarantee income even when business operations are halted due to property damage or property inaccessibility. This is a peril found under commercial property insurance.
Commercial Risk Insurance Customized for Your Business
That wraps up our guide on examples of commercial risk and how commercial risk insurance can help protect your organization. If you’re looking to set up a comprehensive commercial risk insurance bundle for your business, we’re here to help.
KASE Insurance is an award-winning insurance brokerage firm in Toronto. We specialize in putting together customized insurance plans for virtually all business types. At whatever stage you may be in your journey, our team of insurance experts is ready to be at your service.