When managing risk consider insurance
Though most people don’t consider how risky everyday life can be, most companies and organizations understand that risk exists around every corner. The trouble is that some companies still do not take adequate steps to properly manage risk. Consider the recent incident of the executive who died via a treadmill accident when he hit his head. Though the accident was a freak accident- nonetheless it happened. If you drill down a little closer, you will find out that fatalities related to exercise and sports are not that uncommon. Perhaps they are more common than we would like to believe. Everyday life, whether business related or not, carries a certain amount of risk. Though companies may use insurance to manage risk, the problem arises when the insurance program in place doesn’t really address the potential risks the company faces. That is the problem many companies dont realize until it is too late- say after that catastrophe that wiped out the stock or assets of the company.
It should be noted that companies use insurance as a risk mitigation or transfer tool and that they manage insurance programs differently than the average consumer. However, when developing a risk assessment of insurance considerations, data is extremely important when considering a probability or a risk-related event. The collection of relevant data will determine what kind of insurance policies can be obtained, the price, and even the availability of certain insurance programs. How far back a company can go historically to obtain data determines the potential risks a company faces and, therefore, what insurance program and insurance provider is available as well as the costs involved.
When looking at risk insurance programs, the first question that should be asked by the company is whether it has accurate data. Does it have a good risk management information system in place? If not, does its insurance broker or provider have one? Or maybe the insurance broker or provider can help develop one.
Accurate data leads to the right risk management strategy and the right insurance program. Lack of data makes it harder to have an accurate picture as to the risks involved and, therefore, harder to develop the appropriate insurance strategy and program. It is necessary to obtain accurate historical data if at all possible.
The main reason that companies make extensive use of insurance coverage is to diversify and shift risk through use of business-related insurance. Insurance, if properly used and maintained can be a major risk management tool.
A major issue facing companies when trying to insure legal risk is the insurability of the risk. In essence, the cost of insuring the risk may be too great to justify the particular form of risk insurance. So when a risk assessment identifies a business risk, not only does the company need to determine if insurance coverage exists to cover the risk, but whether the cost of such insurance justifies its acquisition. Many manufacturing companies will not purchase product recall insurance or similar insurance because of its expense. Some manufacturing companies or organizations will not even purchase credit insurance because of its expense. Therefore, a company or corporation must pay attention to costs and consider methods to reduce the cost of insurance.
Questions you should ask yourself when considering insurance:
- Is the risk analysis accurate?
- Can the current insurance coverage adequately minimize risk?
- Are the insurance policies in effect priced correctly?
- Does the cost of the insurance policy justify its acquisition?
- How to best use insurance as a risk management tool to transfer risk?
- Is the broker giving sound advice?
As with anything, asking the right questions is half of the battle.