01 Feb Risk management, not simply buying insurance
Risk management is perceived by most people as simply buying insurance. As a result, many companies take out insurance assuming they will be protected from all the risks that they face. As Covid-19 has demonstrated, this approach is a rapidly eroding model that doesn’t take stock of risks that are in fact only partially or completely uninsurable.
Risk conscious companies, understand that while insurance is an important aspect of risk management, it is by no means the only tool at their disposal to address their risk profile in totality. They understand that other risk treatment options may be less costly in specific situations, and in some cases, certain risks are in fact partially or completely uninsurable.
As a guiding principle, pure risks are insurable whilst speculative risks are uninsurable. A pure risk generally refers to a threat that results in sudden and unforeseen loss such as a safety incident, fires, natural disasters and property damage. Companies normally don’t have the financial capacity to field this type of risk on their own and from a strategic point of view, it absolutely makes sense to transfer the risk to an insurer.
A speculative risk, on the other hand, is strategic in nature and entails voluntary risk-taking in order to generate superior returns. Examples could include the company entering into a new market, introducing a new product, engaging in new competition or even increasing their risk of reputational damage. Companies normally have a moderate tolerance for these risks due to the perceived business benefits.
Risk conscious companies don’t solely rely on insurance to manage their risks, and employ the following four risk treatment options:
• Risk Avoidance: The risk is avoided by changing approach in some way to bypass the risk. A manufacturer for example can avoid the risk of product failure by refusing to introduce new products. The aim of this risk response strategy is to eliminate the uncertainty associated with the risk.
• Risk Reduction: If a risk cannot be avoided, perhaps it can be reduced. This refers to traditional risk mitigation or reduction of either the likelihood of the risk occurring or the impact that it will have. A manufacturer for example can reduce the risk of product failure through careful product planning and market testing. The aim of this risk response strategy is to modify the exposure or size of the risk to acceptable levels.
•Risk Acceptance: A company will, and probably must, take on certain risks as part of doing business. The risk may be accepted in certain cases as there is a low impact or likelihood. The company that markets a new product assumes the risk of product failure – after first reducing that risk through market testing. The aim of this risk response strategy is to take on the risk and hope that
• Risk Transfer: Certain risks can be insured against whereby some or all of the risk is transferred to a third party. An insurer agrees, for a premium, to assume financial responsibility for losses that may result from a specific risk. The aim of this risk response strategy is to allocate ownership to the third party best able to manage the risk effectively.
Insurers also incentivise companies to have effective risk management programmes by making them eligible for lower insurance premium or deductible structures. Having an effective risk management programme in place shows an insurer that your company is committed to loss reduction or prevention, making it a better risk to insure.
The insurance broking model is also evolving, with brokers needing to offer a broader range of risk management services beyond insurance advice. These newer generation brokers have become Risk Advisors to their clients with their servicing plan evolving from that of the “Provision of Insurance” to rather focusing on all aspects of “Risk” in its broadest sense. Risk Advisors will structure their service delivery to ensure that their clients receive professional advice and consistent levels of service on all risk related issues such as:
A detailed understanding of your business, products, process flows and supply chains
Identifying potential risk exposures associated with your business processes and activities
Seeking and proposing solutions to either eliminate these exposure areas through conventional insurance or if appropriate, to finance or manage these risks in the most cost-effective manner.
Partnering with their clients to assist them in reducing the overall cost of risk to the company
This is where the value of dealing with an expert Risk Advisor becomes critical. A Risk Advisor that understands the industry and business landscape as well as the trends and emerging technologies that may disrupt the business going forward, is paramount to having a well-rounded risk management strategy and insurance solution. Of paramount importance is the realisation that insurance is not the cure-all for all risks, and that buying insurance without risk advice and mitigation strategies is the riskiest approach of all.