Business owners are often considered natural risk-takers.
But beyond the obvious entrepreneurial risks, businesses are vulnerable to less obvious threats. Are these threats on your risk radar? And do you rely solely on an insurance policy for your entire risk management solution?
Internal and external risks are part of any business. Exposures can be physical (property and people), legal (liability and compliance), social (corporate image and public relations), economic (marketplace and operations) or juridical (jury or judicial decisions). Your success is driven by your ability to identify and manage all of these exposures through an effective risk management program.
What is risk management?
The basic premise of risk management is protecting assets by identifying, analyzing and controlling exposures or risk. An exposure could be anything — situation, practice, condition, activity or resource — that might lead to loss and impact success.
How do you control exposure? You can start with the five elements of risk management.
1. Identification. You have to know a risk exists to manage it. Determine and categorize exposures through policy and procedure reviews, compliance reviews, physical inspections of property and operations, loss activity reviews, contract reviews and insurance policy analysis.
2. Analysis. Assess each identified exposure to determine the impact a loss could have. This will help you prioritize and make good decisions.
3. Control. Risk management is aimed at minimizing loss potential at the most efficient cost. There are more options than you may realize.
* Avoidance — totally eliminating an activity and/or exposure. Examples include razing a dilapidated building or removing an element of a production process that could cause injury.
* Prevention — reducing claim frequency. This could be removing an ignition source to prevent fire loss or implementing additional safety training.
* Reduction — reducing severity of financial impact from losses that do occur. For example, you could install a fire wall or a sprinkler system to prevent the spread of fire.
* Segregation/separation/duplication of exposures — reducing loss severity. This includes not relying on a single supplier for products, materials and services (segregation), utilizing warehouses in different locations (separation) and implementing data back-up procedures (duplication).
* Transfer — contractual and/or physical transfer of risk. Consider hold-harmless agreements or using a common carrier for goods transportation.
4. Finance. A business must acquire funds to pay for potential losses. The most common source is an insurance transfer, which represents the acquisition of external funds.
An insurance transfer typically requires internal funding sources. However, insurance should never be viewed as a substitute for loss control or a sole means of risk management.
An alternative finance approach is the acquisition of external funds via a contractual agreement, such as using a hold-harmless and indemnification agreement to shift funding for losses to a third party.
5. Administration. Because exposures are constantly changing, risk management should be a continuous process. An effective risk management program includes developing and implementing policies and procedures, along with regular review and updates of the program.
Whether an organization employs a risk manager or simply adopts the basic risk management tenets, its success depends on the ability to identify and manage exposures. A good program addresses all risks associated with organizational activities — past, present and future.
Ultimately, risk management is aimed at protecting an organization from financial harm. That includes the protection and enhancement of assets, people and corporate image.
Reach Steve Blankenship, manager, Underwriting Practices Group, at (330) 887-8417 or [email protected]. In business for more than 156 years, Westfield Insurance provides commercial and personal insurance services to customers in 17 states. Represented by leading independent insurance agencies, the product it offers is peace of mind, and its promise of protection is supported by a commitment to service excellence. For more information, visit www.westfieldinsurance.com.
