Business Risks and Mitigating Those Risks with Insurance

16 Nov Business Risks and Mitigating Those Risks with Insurance

Running any business is inherently risky and that goes for any type of business whether it is a kid’s yard mowing business or a Fortune 500 corporation. Each business has its own level of risk and the types of risk can be categorized into the following groups according to an Investopedia article written by Marc Davis named Identifying and Managing Business Risks

Types of Risk

• Physical Risk – This category would include items like fire, explosions, and hazardous materials. Government agencies like OSHA and local fire departments can help a business acquire information to prevent accidents of this nature in the work place.
• Location Risk – These hazards would include wildfires, storm damage, floods, hurricanes, tornadoes, earthquakes, mudslides, ice or snow storms and any other natural disaster.
• Human Risk – This category would include employees who are suffering from sickness, alcoholism, and drug abuse. It would also include employee behaviors like embezzlement, theft and fraud as they have a major impact on a company.
• Technology Risks – This category would include power outages, telephone failures, and hackers attacking the company database or website.

Prioritizing Risk

After you have reviewed your company and assessed which risks are a potential in your business you then need to give each one a risk priority based on how likely the event will happen.

Risk Probability Scale suggested by Marc Davis

1. Very likely to occur
2. Some change of occurrence
3. Small chance of occurrence
4. Very little chance of occurrence
5. Risk Prevention

Company Policies/Procedures to Help Mitigate Risk

As they say, an ounce of prevention is worth a pound of cure. Below are some ideas of policies or procedures you can implement in order to help prevent or mitigate risk within your company.

• Employee training
• Background checks
• Drug screenings
• Safety checks
• Equipment maintenance
• Maintenance of building and grounds
• Fire drills for staff, smoke detectors, fire alarms, fire sprinkler system installation
• Explosion/ hazardous materials training for manufactures who use things like acid, gas, toxic fumes, toxic dust, poisonous liquids or waste
• Security – security personnel, camera systems or both
• Hiring a Risk Manager or Risk Management Consulting Firm

Risk Management Life Cycle:

It does not matter whether your hire a Risk Manager full time to work in your business or you hire an outside Risk Management Consulting Firm. What matters is that you take your risks seriously and in doing so create a plan to mitigate risk. Below is a sample chart of the Risk Management Life Cycle.

Managing Risk with Insurance

A company can use insurance in order to manage their risk exposure. According to the US Small Business Administration there are the following
Types of Business Insurance

• General Liability Insurance – This type of insurance is used to cover legal issues that occur due to an accident, injuries or claims of negligence. They protect against payments as a result of bodily injury, property damage, medical expenses, libel, slander, the cost of defending lawsuits, and settlement bonds or judgments required during an appeal.

• Product Liability Insurance – Companies that manufacture, wholesale, distribute and retail a product may be liable for its safety. This type of insurance protects the business owner from financial loss relating to a product defect that causes injury or bodily harm.

• Professional Liability Insurance – Business owners providing services should consider having professional liability insurance (also known as errors and omissions insurance). This type of coverage will protect a business against malpractice, errors, and negligence in providing services to your customers.

• Commercial Property Insurance – Property insurance covers everything related to the loss and damage of company property due to a wide-variety of events such as fire, smoke, wind, hail, snow, civil disobedience and vandalism. The definition of property is broad as it includes lost income, business interruption, buildings, computers, company papers and money.

• Home-Based Business Insurance – Home owners’ insurance policies do not generally cover home-based business losses. Depending on risk to your business, you may add riders to your homeowner’s policy to cover normal business risks such as property damage. Home owners’ policies do not cover other risks and therefore you would need general and professional liability insurance.

Risk Management Resources:

http://www.investopedia.com/articles/financial-theory/09/risk-management-business.asp
https://www.business.qld.gov.au/business/running/risk-management/risk-management-plan-business-impact-analysis
https://hbr.org/2012/06/managing-risks-a-new-framework
https://hbr.org/2009/10/the-six-mistakes-executives-make-in-risk-management/ar/1

Insurance Resources:

http://www.forbes.com/sites/thesba/2012/01/19/13-types-of-insurance-a-small-business-owner-should-have/
http://www.sba.gov/content/types-business-insurance
http://www.allstate.com/tools-and-resources/business-insurance/small-business-insurance-need.aspx