Risk management and business insurance remain important in soft market Featured

8:00pm EDT August 26, 2010

In September 2008, the global economy was on the brink of its historic collapse, about to slip from the precipice to the abyss. In September 2009, the financial challenges posed by that collapse ranked as the overwhelming top risk for businesses, according to several national surveys. And now, in September 2010, well, the inevitable recovery appears to have started and some sense of optimism has seeped back, but the risk that swirled just last year remains — heavy, ominous — for businesses large and small, for businesses like yours.

If you do not have a thorough risk management and business insurance plan in place now, you should start to develop one as soon as possible. After all, recovery or not, there remains a great deal of uncertainty about the economy, and you should pay attention to and manage your risk. If you do not have a relationship with a risk management firm — or at least have an internal executive in charge of that department and those decisions — you need to pick up the phone now.

Because just as the economy has changed, so, too, has risk management.

“Over the last decade, risk management has really been maturing toward an enterprise or strategic approach to identifying, analyzing and managing risks,” says Deborah Luthi, vice president of the board of directors, Risk and Insurance Management Society Inc. “This approach really targets key risks, both insurable and uninsurable business risks, that most directly affect organizational performance.”

Those risks can include things like workers’ compensation, property insurance and general liability.

“The financial meltdown and the economic slowdown have really brought a heightened duty of care, disclosure and discussion regarding risk to the board level of organizations,” Luthi says. “So I think putting a strategic risk management process in place provides a framework for the board to consider risk and reward for balancing profit and risk against accomplishing the organizational mission.”

Plan and move forward

If you do not work with a risk management firm now, the first question is, of course, “Why not?” The second question is something along the lines of, “Do you really need to work with an external firm?”

Especially today, with revenue and profits just inching up — if they are increasing at all — and every dollar a precious commodity, would you really benefit more from bringing in more experts from the outside rather than turning to your own internal experts?

“You can keep this process relatively simple, and organizations that are farther down the road in terms of enterprise or strategic risk management have found that you can sometimes get wound up in the process and not get it linked into the planning,” Luthi says. “The response that we hear most often is, ‘Keep it simple and designed and customized for your organization.’ I don’t think any organization that practices risk management uses a cookie cutter. Everyone needs to customize it to their own organization.”

You might delegate the responsibilities to a team of executive leaders, with your chief financial officer or chief risk officer at the helm. As always, keep in mind that so many of your employees are already strapped for time each day and might be overwhelmed by additional tasks — especially one so important and intrinsic to the future of your business.

If you do work with an external firm, build a relationship with it as you would with any other business adviser. The firm is on or near the same level as your accountant, your attorney and your banker. The longer and more closely you work with the firm, the more your risk management will actually take effect in your business plans.

“As insurance companies evaluate clients, one of the things they’re looking for is stability within their organization,” says Jim Gloriod, resident managing director, Aon Risk Services. “So the longer you’re with an insurance company, the better a relationship you can build up, [and] when you do have the big claim, if you will, having that relationship there is very helpful in getting resolution to the matters. The other thing that will happen in the long-term relationships is that, when the market does turn hard, you probably won’t see quite the spikes in prices that those companies who have moved around will see. Those are the major benefits.

“You form a relationship, you get to know how to work together, what the expectations are, and you really come down to being able to fulfill each other’s expectations.”

No matter which route you choose, you will likely want to listen to experts who recommend you chart and graph — yes, graph, just like back in geometry and physics — a framework to use in order to reach your decisions. Chart both insurable and uninsurable risks — your uninsurable is your brand and your reputation — in order to be able to make decisions and define your risks.

“It’s a matter of communication,” Gloriod says. “It’s important for the broker and the client to have constant communication, so that expectations are clearly laid out from both sides — so the broker can deliver them and, from the broker’s side, if something has changed with the risk or in the marketplace, they need to communicate that information to the client.”

Invest and remain active

At many businesses, risk management and business insurance were in that first batch of budget cuts back in late 2008 or early 2009. Everyone needed to cut costs, and a good chunk scaled back on insurance. But the commercial insurance market was soft in 2009 and has become even softer in 2010, making this an ideal time to either jump back in or invest even more.

But money is only one part of the plan to take advantage of your risk management and insurance. Talk with either your internal leader or your external firm and determine where you are and aren’t covered. Many businesses have invested heavily in product recall, privacy coverages, and employee health and benefits during recent months. The only way to keep track of all that is to remain involved on a regular basis. That will also afford you the opportunity to perhaps view your risks from a wider perspective — what several industry experts refer to as the enterprise risk management approach — and to consider your options from multiple angles.

“I think the larger organizations started down that path the last three to five years, and I see a lot of smaller and midsize organizations are doing that, as well,” Gloriod says. “They’ve probably always done it, and probably a little bit better than the larger organization because there wasn’t as much to evaluate. But I see the more midsized companies moving to a more formalized process.”

You need to pay more attention to your risks and insurance now than during the best of times, and with the soft market still very much in play, you should probably continue to invest as much, if not more, in protecting your business for the future.

“I think it’s valuable no matter what size the company,” Luthi says. “All companies serve a purpose. They have stakeholders or shareholders; they’re there to provide a service or a product — and organizations often do this intuitively. But there’s something about having a process that facilitates, that documents, that gets this process down on paper or on the computer.”