Finite Risk Insurance

A type of temporary insurance policy that allows a company to pay for big losses over time instead of all at once.

There are a lot of ins and outs with finite risk insurance, and it can end up being a pretty good deal for both the insured and the insurer if things go well.

Allow us to illustrate with a fun example involving everyone’s favorite topic: toxic waste.

We started a company back in the ‘90s that helped average, everyday people become superheroes by dipping them in vats of toxic waste. We decided that once we’d dipped five clients into a single vat, all of its superhuman juju was probably used up, so we disposed of the rest of it by flushing it into the nearby stream.

Well, shock of all shocks, dumping toxic waste into a stream caused bad things to happen. By 2018, Supermakers, Inc. was not only facing lawsuits for poisoning people downstream from our facility, but we’d also been charged to clean up our environmental mess, and it was going to take about three years and cost somewhere in the neighborhood of $100 million. Now, if we don’t have $100 million on hand to pay for the cleanup all at once, we can try and get our hands on some finite risk insurance.

In simple terms, an insurer offers to cover the cover the $100 million, and they set up an account with the full amount needed. They use this account to pay for the cleanup. Our premium payments go into another account where they earn interest for us and for the insurer. Sounds great, but that coverage comes at a cost. We’re probably going to pay higher-than-average premiums, and depending on how the contract is written, we might end up paying even more than that if our cleanup ends up costing more than $100 million. But on the plus side, if it ends up costing less, we’re going to get our extra money back, plus any interest our premium payments earned while they were chillin’ in their separate account.

Once the cleanup is done and any profits and losses are divvied up between Supermakers and the insurance company, the policy is considered terminated. There are other types of risk coverage, financing, and insurance out there, but depending on our company’s financial situation and what we’re facing, finite risk insurance might be something we should strongly consider. We should also, by the way, consider a new business model that doesn’t involve dipping people in toxic waste.