It is very apparent that companies and organizations operating internationally face unprecedented global risks. Global risks are not only interconnected but have systemic impacts requiring systems that can help companies measure, foresee and understand them in an uncertain and dangerous world. Global risks in today’s international market place are forcing companies to review the traditional risk management tools that have been used for many years and to consider new concepts and tools to address the risks companies now face.
The risks companies face globally, calls for processes and procedures that help institutions effectively coordinate responses to risks and help companies better manage risks on a global scale. Of course a number of risks comer to mind, namely:
-Economic Risks- risks that include fiscal and liquidity crisis
-Environmental Risks- risks that include natural and man-made disasters
-Geopolitical Risks- risks that cover terrorism, global governance, etc.
-Societal Risks- risks associated with social stability including pandemics, etc.
-Technological Risks- risks associated with information and communication technologies
Though, the above mentioned list is not exhaustive, the basic set of global risks are those that most risk managers are worried about and reflect risks that can have to greatest impact upon the operations and in fact existence of many organizations.
Among the tools needed to mitigate the effects of global risks that many companies face are new and more flexible insurance products. Insurance, if used properly, is a great tool to mitigate risk or shift the exposure of risk to another entity (i.e., the insurance provider). Many companies still fail to adequately consider insurance options when considering tools that can shift or transfer risk of loss, litigation, or claims. A proper risk management program to address global risk needs to adequately address these issues and to consider the insurability of risk. Insurance, if properly used, can be a great tool. It all starts with a risk assessment such as set forth below.
Insurance Considerations: Risk Assessment
Conduct a risk assessment to create a business risk profile to identify factors that have the greatest financial impact, and 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.Evaluate cyber security insurance for instance. Is it necessary?
- Investigate establishment of a captive insurance company to offer more flexible insurance products.
- Consider custom-designed protection programs by product line (e.g., televisions, automobiles, or financial products).
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.
Remember, risks can come from many sources. The greater the interdependencies between companies and countries, especially as it relates to economics and technological systems, the more likely it is for global risks to bring about unforeseen and problematic events and consequences. Companies need to review all risk management tools and processes in light of these issues and to consider the use of more flexible processes such as forms of global insurance to help deal with the risks that multinationals now face.