Insurance & risk management for businesses

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Risk is an intrinsic part of doing business, and managing business risk means managing the protection of your employees, customers, other stakeholders, property, information and the environment. When many business owners consider risk management, it’s usually restricted to buying typical insurance protection with little thought about other means of protecting the business. Proper business risk management is a policy or programme that works to avert all types of problems due to risk and uncertainty.

While the actual risk management processes may differ in small and large companies, the problems that occur as a result of poor risk management are similar. Unmanaged risk produces insufficient security and safety measures, which can cause financial loss, erode profits and create needless liabilities. Inadequate risk management can even frighten away venture capital funding and lower your bank rating status.

Benefits of risk management
Risk management programmes oblige companies to cautiously review their administrative, accounting, financial, management, personnel and insurance policies. Cautiously appraised risk management policies generate both tangible and intangible benefits:

  • Good risk management can decrease business and liability insurance premiums (similar to the way that a security system can reduce your homeowner´s insurance).
  • Recognised risk management programmes are often accepted by major insurance underwriters for reducing premiums.
  • Risk management lessens your chances of being sued and increases your chances of succeeding in a lawsuit if you are taken to court.

Risk management strategies
All businesses are vulnerable to losses from uncontrolled risk. Your risks will differ according to your business exposures and geographical location. Your response can be to either mitigate or avoid. Risk mitigation can be done by avoiding, transferring, terminating or treating the risk. Proactively choosing the right types of insurance policies is one way to protect your business against unanticipated events, including unauthorized trading, fraud, forgery and robbery.

Insurance is a fundamental part of and not a substitute for risk management. The most common types of commercial insurance are property, liability and workers’ compensation. Unfortunately, there’s no such thing as a one-size-fits-all insurance product for small businesses. Therefore, you have to construct an insurance portfolio by buying several distinct insurance products. Depending on your business, you may want additional specialised coverages. The following categories are most useful to a typical small business:

Commercial Property Insurance–Covers the loss of and damage to business property, e.g. fire damage to your building.

General liability Insurance–example: pays for damage you commit to someone else’s property. This typically covers property damage, bodily harm, medical expenses and the cost of hiring legal counsel to defend your company.

Errors and Omissions Insurance aka Professional Liability Insurance–covers services instead of products and protects against malpractice, errors and negligence. Example: pays for a civil lawsuit settlement arising from a faulty business practice.

Workers’ Compensation Insurance–covers you for an employee’s on-the-job injuries.

Business Interruption Insurance–covers lost income and expenses resulting from property damage or loss. Example, if a fire forces you to close your doors for two months, this insurance would reimburse you for salaries, taxes, rents and net profits that would have been earned during the two-month period.

Product Liability Insurance – covers expenses related to legal liability for injury or damage caused by a defective product. If your company produces, distributes or sells products at retail then it would be wise to get product liability insurance.

Directors’ and Officers’ Liability Insurance–generally purchased by corporations and nonprofit organisations to cover the costs of lawsuits against directors and officers.

Health Insurance–is required by law. The scope of and options for this type of insurance are wide, covering things such as dental, optical, and medical expenses. Many health insurance plans also include life and disability coverage for employees as well. You as the business owner have the option of participating in this plan, or purchasing your own life/disability coverage separately.

Key-Man Insurance–will protect the business from suffering if a key employee is disabled or dies. It incorporates two different types of policies, being disability and life insurance. Both will help cushion the time and effort required to find a suitable replacement employee, cover a lack of cash flow due to lower sales or lack of productivity, and other financial detriments that go along with losing (even temporarily) a key person to the business.

You can also concentrate your company´s formal risk management efforts on operational risk exposures. Consider the following tips:

  • Evaluate ways to control any data-security risks, especially if your business transacts e-commerce, and most businesses do these days.
  • Develop management strategies to decrease the rate and severity of these risks.
  • Recognise the operational risks and susceptibility to such risks in your daily business activities and take steps to reduce them. For example, financial companies, gas stations, restaurants and other businesses that handle large volumes of cash should be alert to the likelihood of crime and take measures to prevent operational loss.
  • Arrange to quickly respond to an emergency or a disaster. Have a plan that enables you to immediately resume business when disaster or emergency occurs.

Contingency planning exceeds just buying insurance. There are many techniques to manage risks, for example:

  • Implementing policies and procedures that value employee safety over speed
  • Avoiding transactions with doubtful potential customers and suppliers
  • Succession planning–training high potential staff on the roles and responsibilities of their superiors to guard against key person losses.

An effective risk management plan is detailed and imaginative. It’s not just insurance. They should be reviewed and updated regularly. Bi-annual reviews and updates to reflect current business conditions are a wise investment. Review meetings should include the owners, department heads and (if necessary) a risk management consultant. Often, insurance companies – with an eye on minimizing claims payouts, provide practical advice on mitigating new risks as they emerge. During the update period it would be a good idea to engage them as well.

Having a good knowledge of risk management for your business will also be important if you intend to raise capital from investors. It is essential for making them comfortable with the investment opportunity.

Reckless leaders take careless risks; sensible leaders take calculated risks. Risk management is the “calculator.”

Gregg Anderson, MBA, CMC
MD, VisionQuest Management Services Ltd
T: (345) 916-6777
E: [email protected]

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