What Does Small Loss Principle Mean?
Small loss principle is an insurance principle where the insured keeps low-severity risks that are not disastrous. This principle can be absorbed without causing any major effects on the monetary structure of an individual or business. The premium paid by the insured reflects their projected losses including the expenses of the company and contingencies.
Insuranceopedia Explains Small Loss Principle
Entrepreneurs are always looking for ways to limit their risks. To do this, they look into their business and determine which things they can afford to lose in each step. They try to avoid finding big or all-or-nothing opportunities that will make them lose everything. The small loss principle is an insurance principle allows individuals to protect their financial structure for any projected small losses. For instance, a small loss of the inventory due to theft or burglary can be considered under the small loss principle. By opting for the small loss principle, it is easier for insurance companies to pay the insured because the value involved is only small compared to bigger contingencies like bankruptcy.