Use Risk Management To Cut Your Insurance Costs

Effective risk management can help a business run smoothly, without the disruptions caused by accidents. It allows the business’s assets to operate at full capacity, maximizing productivity. One other important benefit: It helps keep insurance costs down.

One risk management technique is avoiding activities, properties, or equipment that carry a high risk of accidents. For example, an earth moving contractor may decide not to offer blasting operations because of the high risk of injuries or property damage.

Businesses may decide to avoid even low-hazard activities and properties because they do not want the insurance costs that come with them. A business may rent a building instead of buying one for this reason.

Avoiding risks may be impractical or counter-productive, as the business may pass up profit opportunities. When this is the case, a business has two alternative risk management techniques.

One technique is to prevent losses from happening, or at least reduce their likelihood. Example of this include:

  • Guards on industrial cutting machines to prevent users from getting their hands in the way of the blades
  • Keeping flammable debris away from buildings
  • Monitoring the condition of brakes and tires on business vehicles
  • Requiring ladders on a construction site to be secured to the building so they do not tip over

Another technique is to limit the damage from the losses that do occur. Examples include:

  • Fire sprinkler systems in buildings
  • Protective clothing, such as gloves and hard hats, for construction workers
  • Safety belts and airbags in vehicles
  • First aid kits

Some measures may both prevent and reduce losses. For example, central station burglar alarms may deter thieves from breaking into a building (prevention). The noise they make may also cause thieves to leave quickly, limiting how much they can steal (reduction).

One technique commonly used in the construction industry is risk transfer, where one party requires another party to assume its legal liability for losses. For example, a general contractor may require all the subcontractors it hires to assume its liability for any accidents that happen during the project. If a pedestrian gets hurt and sues the GC, the lawsuit becomes the sub’s problem and the GC will not have to pay.

When businesses prevent, reduce and transfer losses, their insurance premiums may decrease for two reasons. First, insurance companies compete for the business of companies that do these things. Given a choice between a company that checks out the condition of its trucks every month and one that has not done it in years, the insurer will likely choose the first one.

Second, over a period of years the company’s loss activity should decrease. Many insurance policies are priced using what is called “experience rating,” a formula that adjusts the current premium based on past loss experience. Companies with good past loss experience earn lower experience modifications, which reduces their premiums.

Good risk management makes the workplace safer, preserves a business’s assets, and avoids disruptions. By keeping a lid on insurance costs, it also adds to the bottom line.

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