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The risk library  /  What your balance sheet can absorb

Art. 17 · What your balance sheet can absorb · 3 min read

When you should take the hit yourself

There is one test: could you pay this loss today without changing what the business does?

If the answer is yes, and the loss is the kind that turns up occasionally rather than catastrophically, you are probably better off keeping it. You save the loading, the 20 to 40 pence in every pound that never comes back, and over a long run of ordinary years that is real money.

If the answer is no, transfer it, and do not spend much time optimising the price. What you are buying there is survival, and survival is worth a margin.

Most businesses have the dial in roughly the wrong place: they carry a small excess on frequent, survivable losses (expensive) and a modest limit on rare, catastrophic ones (dangerous). Both are the same mistake: treating all risks as one category.

bigger smaller ABSORB Pay it yourself, and don't claim. Your excess lives here. TRANSFER Too big to swallow, still sanely priced. This is what insurance is for. PREVENT AND PLAN Uninsurable, or priced far above the risk. Reduce it. Build redundancy. Have a plan. your excess your limit The two dashed lines are the only decisions here, and both are yours to set.
Fig. 19 · Every loss your business could suffer lands somewhere on this ladder. The excess is the boundary between band one and band two; the policy limit is the boundary between band two and band three.

A practical way to find your boundary: look at the largest unexpected bill you have paid in the last three years without needing to borrow, delay a project or have a difficult conversation with the bank. That is roughly your genuine absorb threshold today. It is usually higher than the excess you are carrying.

Use it

  • Set the threshold as policy, not per case. "We self-fund up to £X" is a decision made once, calmly, rather than repeatedly under pressure.
  • Then move your excesses to match it. Ask for the priced options; the saving on the frequent, small-loss policies is usually the biggest single line available.
  • Spend what you save upward. Take the premium released and put it into higher limits on the risks that could actually end you.

Want this run against your own numbers?

We put ranges, not single figures, against the risks your business actually carries.

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Explanatory content only. This article describes how insurance and risk decisions work in general terms; it is not insurance, legal, actuarial, or investment advice, and it is not a recommendation to buy, keep or cancel any cover. Every figure and diagram is illustrative, chosen to make a mechanism visible, not to describe any particular business.