Global Risk Insurance
Insurance, if used properly, is a great tool to shift legal risk or exposure to another entity (i.e., the insurance provider). Many companies fail to adequately consider insurance options, cover risk, or consider appropriate insurance tools that can shift or transfer risk of loss, litigation, or claims. A proper legal risk management program needs to adequately address these issues and to consider the insurability of risk. Insurance, if properly used, can be a great LRM tool. It all starts with a risk assessment such as set forth below.
1 Insurance Considerations: Risk Assessment
Conduct a risk assessment to create a business risk profile to identify factors that have the greatest financial impact, then integrate appropriate risk transfer strategies to
• stabilize insurance costs,
• mitigate extraordinary financial impact,
• ensure cost effective protection against catastrophic losses,
• leverage risk bearing capital, and
• Optimize tax and accounting issues.
Conduct an analysis of current coverage, amounts, deductibles, and excess. Consider custom-designed protection programs by product line (e.g., televisions, automobiles, or microwave ovens).
Evaluate product recall insurance. Is it necessary? If necessary, investigate establishment of a captive insurance company. What about geo-political risk? Consider insurance options.
2 Historical Data
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. 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 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.