Small Loss Principle

What Does Small Loss Principle Mean?

The small loss principle is an insurance concept where the insured assumes low-severity risks that are not catastrophic. Such risks can be managed without significantly affecting the financial stability of an individual or business. The premium paid by the insured reflects their anticipated losses, along with the insurance company’s operational expenses and contingencies.

Insuranceopedia Explains Small Loss Principle

Entrepreneurs are constantly seeking ways to minimize risks. They evaluate their business to identify what they can afford to lose at each stage. Rather than pursuing high-stakes, all-or-nothing opportunities that could result in significant losses, they focus on manageable risks. The small loss principle in insurance allows individuals to safeguard their financial stability against minor, anticipated losses. For example, a small inventory loss due to theft or burglary falls under this principle. By adopting the small loss principle, insurance companies find it easier to compensate the insured, as the amounts involved are relatively minor compared to larger contingencies, such as bankruptcy.