Every organization has risks; they are unavoidable. Therefore, every organization, whether it realizes it or not, practices risk management. Those who do it well reduce their costs, particularly for insurance premiums.
The first step in risk management is to identify the organization’s loss exposures. They could be any buildings or property it owns, such as furniture or goods held for sale. They could be cars, trucks or heavy equipment used in the business. They could also be activities the organization performs, such as consulting, running a store, or paving a road. Finally, they could be products it makes or sells or its finished work.
The next step is deciding how to control the exposures. These are the options:
- Deciding not to take on the exposure. For example, the organization may decide not to manufacture a certain product.
- Taking on the exposure and trying to keep losses from happening. The organization decides to make the product but designs it with safety features to prevent injuries.
- Taking steps to make losses that do happen less severe. The manufacturer designs the product to automatically shut off under certain conditions.
- Signing a contract with someone else who agrees to take on the risk. The manufacturer requires companies that install the product to assume the liability for any resulting injuries or damages.
- Absorbing the cost of some losses. The manufacturer decides to pay the first $5,000 of the cost of any injury the product causes.
- Buying insurance to cover the cost of losses the organization does not want to retain. The manufacturer buys liability insurance to cover the costs of losses above $5,000.
The next step is to implement the risk management options chosen. For example, the manufacturer might design the product following industry safety standards; use lightweight materials to prevent crushing injuries; set up a toll-free phone number for end users to call for assistance; draft contracts with installers that transfer liability to them; and buy general liability and umbrella insurance policies. The last step is to monitor the risk management program’s effectiveness and make any needed changes.
Organizations that practice good risk management can realize several benefits. One of the foremost is reduced insurance premiums. An organization that actively controls its risks is very attractive to insurers. They will actively compete for its business. Also, the more losses the organization retains, the less the insurer has to pay. The insurer will lower the premium to reflect its own reduced risk. Some insurers offer dividend programs under which a business may get part of its premium back if its losses are less than a certain amount.
Beyond that, risk management creates safe workplaces that attract good workers. Safe workplaces are also less likely to be penalized by regulators for violations. They are more productive because managers do not spend as much time investigating accidents and doing associated paperwork.
In short, risk management helps an organization generate more revenue and hold down its costs. Even the smallest businesses can reap the benefits of sound risk management.