Most of us manage risk every day. We drive carefully, lock our homes, hide a purse under the seat, lock our computers, maintain fire extinguishers, and direct deposit paychecks. These actions reduce the potential of something harmful that could cause a financial loss.
Every business (regardless of its size) has its risks to manage each day as well. When running your own business, that responsibility falls on you as the business owner.
Today, Insurance Canopy is going to help you learn how to manage your business’s risks in four steps.
What Is A Risk?
A risk is the chance that something harmful or unexpected could cause you a financial loss. Examples of risks include fire, theft, collision, financial loss, third-party bodily injury, or property damage.
As a business owner, you need to manage risk in each aspect of your business. Your goal is to make sound business decisions to keep losses away from your company.
The common objectives in managing risk are:
- Identifying a risk
- Evaluating the risk
- Treatment of the risk
- Monitoring the risk management plan
1. Identifying A Risk
Remember that risk is the chance that something harmful or unexpected that could cause a financial loss to you and your business. Some risks may be easy to identify, but others may not be or are difficult to admit that it could cause financial loss.
For example, employees. Employees are typically an asset to a business; they make your business world function. But the risks of having employees include:
- Employee Theft
- Work-Related Injuries
- Employment Practices Suits
- Discrimination
- Wrongful Termination
- Harassment
- Failure to Employ or Promote
- Mismanagement of Employee Benefit Plans
The first step in developing a risk management plan is identifying your risk. Make a list of risks that could impact your organization—operational, financial, legal, political, technological, etc. Begin at a high-level and then dive deeper into each risk as needed.
It may take some pessimism to complete the risk list. Don’t think, “this won’t happen to me,” because it may. Think more on the level of “what is the worst thing that can happen?” in each of the areas outlined above. Once the risk is identified, you can now move to evaluate the risk.
2. Evaluate The Risk
The goal of evaluating the risk is to determine the significance of the risk to your business. This can be as simple as rating or prioritizing the risks identified into five categories—very low, low, medium, high, and very high. Rating the risk may assist in associating the probability and impact of the loss related to the risk.
For example, if you are a manufacturer of a vitamin supplement with a manufacturing plant in Europe:
| Risk | Risk Rating |
|---|---|
|
3rd Party Injury or Sickness from Product |
Medium |
|
Lost or Damaged Goods in Shipment |
Medium |
|
Delayed Delivery/Supply Chain Issues |
High |
|
Cyber Crime/Ransomware |
High |
|
Political Risk |
Low |
You also may want to consider adding a column titled “Probability of Risk” or “Impact of Risk,” which can be ranked by numerical order, or a cost range associated with the risk. Once completed, you can focus your time on the risks with the highest impact and probability to your company and work down from there.
3. Treatment Of The Risk
What will you do now that the risk has been identified and ranked? There are four areas to consider with the identified risk: avoid, reduce, accept, or transfer.
Avoid
Risk avoidance is eliminating any potential risk that can damage or threaten your business. For example, you have employees delivering products which opens your business to additional liability exposures. To avoid the risk, you eliminate the delivery service.
It may be difficult or impossible, to implement risk avoidance for your business. Risk avoidance may also keep your business from pursuing other profitable opportunities. Other risk management techniques should be considered when risk avoidance is not feasible.
Reduce
All businesses should have a plan to reduce risk, also known as Risk Mitigation Plan. A risk reduction plan is a method to reduce financial losses or the impact of a financial loss when a loss or claim does occur.
Examples of risk reduction practices:
| Risk/Exposure | Risk Reduction Practice |
|---|---|
|
Theft |
Install Central Station Burglar Alarm |
|
Fire |
Install Fire Suppression System and Alarm |
|
Employee Injury |
Upgrade Safety Standards in the Workplace |
|
Slip and Fall |
Install Handrails; Repair Uneven Concrete |
No matter how hard we try, it is impossible to prevent all losses. The goal is to reduce the effect on the business when the loss occurs.
Transfer
Risk transfer is a risk management strategy that involves shifting the risk from you to a third party by contract or insurance policy.
Contracts: An indemnification agreement in a contract where one party agrees to answer for liability or harm that the other party might incur. The indemnification agreement may specify liability limits and terms, additional insured status, waiver of subrogation, primary and non-contributory language, certificate of insurance requirements, and home-harmless language.
When using contracts as a risk transfer tool, it is important to consult with legal counsel because some state laws require specific wording to make the risk transfer effective. Other states may prohibit specific wording attempting to transfer the risk.
Insurance: Purchasing an insurance policy is one of the most common ways to transfer risk from your shoulders to another party (insurance company). Many risks can be transferred through an insurance policy:
| Risk | Insurance Policy |
|---|---|
|
Fire, Theft, Vandalism |
Commercial Property |
|
Injury from Products Sold |
Product Liability Insurance |
|
Slip and Fall |
General Liability Insurance |
|
Damage to Shipped Goods |
Ocean Marine and Inland Marine |
|
Work-Related injury |
Workers Compensation Insurance |
|
Cyber Crime/Ransomware |
Cyber and Network Security Insurance |
|
Employment Practices Suits |
Employment Practices Liability Insurance (EPLI) |
You and the insurance company have a voluntary agreement to transfer a defined risk. Part of the agreement to transfer the specific risk is that you agree to pay an annual premium, and in the event of a loss, the insurance company assumes the risk.
In the event of a claim, the insurance company assumes the financial loss, not your business.
Accept
All business operations must accept a certain level of risk. Even after implementing risk reduction and risk transfer techniques, you cannot eliminate all risks. Accepting risk should be a conscientious choice knowing the possibility that small or infrequent losses may occur. Risk acceptance is also known as risk retention.
As a business owner, you accept that any problems will be dealt with personally if a claim or loss should arise. Most of the time, you accept the risk that would not be too catastrophic or expensive.
Simply put, risk acceptance is not taking any action for the risk and accepting its impact and consequences on the business.
4. Monitoring The Risk Management Plan
The key in risk management is to always keep observing and monitoring your business for risks. This includes your business operations and any products or services you offer. Anytime you make changes to your business, add a new product, or update a process, be sure to assess any new risks you may face.
It is important to consult with an insurance professional to help discover potential risks to your business and provide risk transfer strategies that will protect you.
Our licensed representatives at Insurance Canopy are here to help you. Give us a call at 844.520.6993 to see how we can protect your business.
