Before you can insure a risk, you have to find it. Risk managers use several methods to identify loss exposures, and each has a trade-off.
Standard survey questionnaire: inexpensive and orderly for common exposures, but a form written for everyone can miss what is unique to one client.
On-site inspection: reveals more, but costs more.
Financial statement analysis: limited to what the statements show.
Loss history review: sees only past losses.
Direct vs. indirect loss: a direct loss is the physical damage itself, such as the burned building and stock. An indirect (consequential) loss is the financial result that flows from that damage, such as income lost and extra costs while the business is closed. Indirect losses are insurable.
Common indirect loss exposures:
Business income: income the firm fails to earn while shut down.
Extra expense: the added cost of staying open after a loss, such as renting temporary space at a higher cost.
Loss of rents: income a landlord loses.
Additional living expense: the higher cost of living elsewhere when a household cannot live at home.