To ensure the continuity of business operations, more companies are analyzing their risk factors that could negatively impact the business. While the field of risk management is increasing in popularity, companies are looking for ways to implement and control costs associated with risk management processes. One risk management technique is to share the risk with a third party through risk transfer. This usually occurs when companies utilize insurance carriers to transfer risk of unexpected losses or damages. Analyzing risk transfer is important to reduce the adverse financial impact a loss could have on a company. Additionally, minimizing expenses associated with risk sharing (e.g. insurance premiums, broker commissions, and administration costs) can increase profits on the income statement. A careful balance of controlling expenses, while maintaining the company's risk sharing goals, is necessary.
ANALYZE INSURANCE NEEDS:
When risk managers look to transfer risk to an insurance carrier, an in depth review of a company's operations, risks, and legal obligations is essential. A review of the vital operations generating revenue against risk exposure, frequency, and severity will help to determine the areas that a company will want to reduce or transfer the risk. With this information, a company is able to determine ways to protect its assets used for generating revenue, thereby reducing the risk of business interruptions. Potential risks include property damage, employee injury/health, product defects, damages caused by negligence, and auto collision. Insurance is a way to share the risk with a third party, usually an insurance carrier.
Common Commercial Insurance Coverages:
• Property Insurance • Business Income • Crime • Equipment Breakdown • Inland and Ocean Marine • General Liability • Automobile Insurance • Workers Compensation • Professional Liability
These coverages are usually grouped together into a business package policy. Package policies are convenient and may reduce premiums if more than one line of coverage is purchased through one company. Another area risk managers should review is the legal considerations for the municipality where they conduct business. Insurance regulation is different from state to state, and certain requirements may be needed for business operation (e.g. workers compensation insurance, auto liability minimum limits). If a company fails to meet these regulations, they may face fines, penalties, or lawsuits.
COST BENEFIT ANALYSIS:
Risk managers look at the cost and benefit of risk sharing to determine which risks a company will retain and what risks they will share with a third party. The expenses associated with risk sharing include insurance premiums, broker fees, administrative costs, and personnel costs. The main benefit of risk sharing is to protect the company's assets from risk of loss that would affect business continuity. If a company decides to retain risk exposures, the expenses from risk sharing would be retained, thereby increasing cash flow. The downside is that, if a catastrophic loss occurs and the company is not in the financial position to cover the loss, the business may fail.
Issues outside the risk manager's control may affect their cost benefit analysis and should be considered during this process. Various issues that a risk manager may encounter during their analysis include budgets set by upper management, legal requirements by jurisdiction, and the company risk financing goals.
WAYS TO REDUCE INSURANCE COSTS:
As companies look to reduce expenses, departmental budgets become tighter. Risk management departments are no exception to this trend, and risk managers are looked upon to control risks efficiently. The technique of risk sharing is beneficial, but is not without expenses that can add up if not managed properly. There are several areas to review for wasted costs within the risk sharing/transfer process.
One would start with a review of its own administrative costs for risk sharing. One may examine if an employee is educated in their position, if there are several personnel covering the same job tasks, if tasks are able to be outsourced to a more efficient company that specializes in risk transfer analysis.
A second area to review is the costs associated with insurance brokers. Commission on the sale of insurance policies usually compensates insurance brokers. For larger companies that invest a significant amount of money in risk sharing, these commissions become hefty. A risk manager should periodically review service level agreements to determine if they are being met. An analysis of the broker costs should be compared against the broker's level of service and benefit to the company.
A third approach is to analyze if there are ways to reduce insurance premiums without significantly sacrificing coverage of risk. Business insurance policies may have overlapping coverages that can be eliminated to reduce premiums. Another way to reduce costs is to increase self-retention through the increase of deductibles. Many carriers provide discounts to companies with high functioning risk management programs. It may be worth implementing risk management programs that reduce a company's risk level.
SUMMARY
Insurance provides benefits to businesses as it reduces the financial uncertainty from losses covered under the insurance contract. The role of the risk manager is to ensure business continuity by reducing risk and/or planning for risk. When company budgets are strained, efficient risk management is imperative. With the reduction of risk, a company will be able to forecast long-term budgets with more accuracy. This allows upper management to review relevant financial data to make well-informed decisions.
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