Business organizations are exposed to various risks and
they need to manage these risks to ensure their long-
term survival. Some of these risks can be managed
through insurance. Initially, insurance was more concerned with the
material damage part only. But with the damage/destruction of assets,
there are other consequences that follow. There is bound to be
disruption in the normal business activities, resulting in loss of sales, which
is ultimately reflected in loss of profit. Loss of Profit (LOP)
insurance has developed because of this need for a comprehensive
insurance solution. Accordingly, there are products offering LOP/Advance
Loss of Profit (ALOP) insurance in conjunction with
fire/engineering/marine policy.
Once the business starts, some costs will be incurred, which
will not be proportionately related to the level of
production/turnover. These will be fixed in nature. These have to be
paid/incurred, irrespective of the extent of business activity and at times,
the turnover may not be sufficient to meet them. These are
salaries, interest on loan taken, taxes, rent payable, etc. These may
also include electricity charges, which may not be
proportionately reduced. These costs are called fixed costs or standing charges.
Then there will be other costs incurred during the actual
operations of the business, which will be related to the level of business
activity (e.g., raw material cost, packing cost, power cost, etc.) These
are variable in nature and, hence, called variable cost or
(specified) working expenses. With the drop in business activity level,
these expenses will be proportionately reduced |
