Every business has insurable risks. Property is the best example of an insurable risk. Insurance underwriters use actuarial science to calculate losses over a large group of insured customers to determine the average premium per customer. In effect the risk is shared by all the insured. In general, those losses that are random in nature (acts of God), financially measurable and not catastrophic (e.g. earthquakes, tsunamis, or volcanic eruptions) are considered insurable. Some risks are mandated by law to be covered by insurance.
Worker’s Compensation Insurance a.k.a Workman’s Compensation Insurance provides for the medical cost of the sustained injury and for lost wages during recovery. In addition, if the worker sustains permanent disability, the insurance provides compensation until the Social Security Administration’s Disability Program starts.
A third factor in determining a fair profit percentage is risk. Risk is divided into two types. The first is insurable and the second is uninsurable risks. Insurable risks are mitigated and have very little to no effect on the profit formula due to transferring the risk to a third party known as the insurance underwriter. Uninsurable risks are non-transferable and therefore the profit must be adjusted to compensate for this type of risk.
