Integrating Risk Management into Your Business Insurance Strategy
Posted by: Dean & Draper Insurance Agency | May 23, 2022
Business owners know that there is no such thing as a risk-free enterprise, but the smart managers utilize risk management to reduce both the possibility of risk occurring and its potential impact.
“Most entrepreneurs are risk takers, willing to invest resources with an expectation and hope, but not guarantee, of reward,” says the Insurance Information Institute. “But, from the viewpoint of insurance, “risk” is another word for “peril” and refers to things that can go wrong. Crime, vandalism, fire, personal injury lawsuit, a computer virus, equipment breakdown, non-delivery of raw materials, death or illness of a key employee – the list of adverse events which can cause economic harm to your business or organization goes on.”
To protect your business properly, owners need to integrate risk management into an overall strategy.
“Effective risk management means attempting to control, as much as possible, future outcomes by acting proactively rather than reactively,” says the Corporate Finance Institute.
Understanding Total Cost of Risk (TCOR)
One of the keys to risk management is understanding your Total Cost of Risk or TCOR.
A TCOR formula might look like:
- Risk Financing or Transfer Costs: Including insurance premiums and broker commissions/fees
- Retained Losses or Loss Costs: Including direct costs of loss such as deductibles and claims that are anticipated and funded inside the risk management plan and indirect loss costs such as additional unfunded business expenses that arise from a claim
- Administrative Costs: These include claim management, risk control and other project costs associated with administrating a TCOR
- Taxes and Fees: Taxes and fees paid to governmental and regulatory bodies
“We believe the key to managing your TCOR requires a strong focused claims management and risk control program,” said Kyle Dean, president and CEO of Dean & Draper. “As your business’s TCOR advocate, we will help provide tactical, technical, and strategic advice as well as management tools, and coverage interruption.”
Defining What is Insurable and What is Not
Carleen C. Patterson and Sheri Swain, speaking at the Public Risk Management Association annual conference said that one of the keys is to define what is insurable and what is not.
While companies always need to focus on controlling spending, cutting back on risk management comes with its own perils, especially if done without proper analysis.
“While overspending to protect against risk makes little business sense, slashing risk management costs without first examining the long-term repercussions can be detrimental to operations as well as an organization’s bottom line,” they said.
They said optimizing TCOR is about balancing retention and risk control with premium.
Five Strategies to Build Your Risk Management Plan
Developing a risk management plan takes time and effort to examine the unique situation of the business in question.
“We talk with the business team, use their business data, and dig into their unique experience to uncover their risk tolerance and build a risk management plan,” said Dean.
Risk tolerance is the first step in building a risk management plan with one of the first questions always asked: “How much risk you want, and can, assume.”
Dean & Draper relies on five strategies to discover risk tolerance for your business and develop a risk management plan:
- Risk Mitigation Strategies: Focuses on the inevitability of some disaster and is used for those situations where a threat cannot be avoided entirely. In this process, we’ll help you develop strategies to mitigate those risks that are unavoidable.
- Retained Risk Strategies: Financing 100 percent of your risk usually isn’t the best method for a company. With these strategies, you may retain a certain amount of risk to lower your dependence on traditional insurance. Your financial strength, company size, and effectiveness of risk management strategies can affect deductible design, amount of insurance needed, and methods of insuring.
- Loss Modeling Strategies: Data is analyzed, looking at past and potential future trends within your risk management program. This helps predict expected total claims for newer policies and how effective your risk management strategies are.
- Non-Insurance Transfer Strategies: Risk can transfer in many forms. Dean & Draper will help you understand the transfer of risk from one person or entity to another by way of something other than an insurance policy. Commonly included techniques include insurance provisions in contracts and indemnity language.
- Insurer Leverage Strategies: The industry has trained insureds that the only way to get the best deal is to “shop” their coverage every year. Unfortunately, that method can be detrimental to building consistency and predictability in your program. Dean & Draper works with businesses to make sure they have a strong underwriting story to tell and get the attention of carriers without burning bridges year after year.
“Risk management is an important process because it empowers a business with the necessary tools so that it can adequately identify and deal with potential risks,” says the Corporate Finance Institute. “Once a risk has been identified, it is then easy to mitigate it. In addition, risk management provides a business with a basis upon which it can undertake sound decision-making.”
Risk Management Starts at the Top
The Insurance Information Institute says that risk management, especially loss control, begins at the top of every organization. If the head of a company makes it a point to emphasize safety and compliance, as well as lawful and ethical behavior in general, then the rest of the organization will follow their lead.
“Risk management costs money, but the costs of not paying attention to safety concerns and not purchasing insurance can be far higher in the long run than any front-end savings,” says the Insurance Information Institute. “While small companies typically do not hire full-time risk managers, risk management should not be left to chance. Specific individuals should be required to take responsibility for safety and compliance programs as well as for insurance matters.”
Contact Dean & Draper today to find out how we can help you implement a risk management program that protects your business.
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