Risky business Featured

8:00pm EDT August 26, 2009

Unexpected events can pop up at any time — often with a hefty price tag. But having appropriate risk management strategies in place can prevent a bump in the road from becoming a detrimental blow to your bottom line.

With today’s shaky economy, it’s likely your budget is slimmer than ever. You’re not alone. According to the Aon 2009 Global Risk Management Survey, 57 percent of those surveyed reported suffering losses due to the economic slowdown. With less cash in your line items, you may be tempted to skimp on insurance to cut costs. But implementing a prevention program and carrying the right amount of coverage can actually save you money in the long run.

“I think now, more than ever, risk management is something that should be on the top of all our clients’ minds,” says Bernie Calonge, managing director and head of the Cincinnati office of Marsh Inc. “They’re certainly looking to protect against any type of losses that might occur in the future.”

It’s likely your business already has at least basic insurance policies in place. But risk management goes beyond paying workers’ compensation premiums. A few basic pre-emptive measures now could prevent a costly incident from ever occurring — and can save you the hassle of dealing with a startling loss.

Determine your risk

Before you settle on what policies and strategies to implement, you must first determine which areas pose the greatest threats to your company’s livelihood. A thorough examination of all aspects of your operation, known as enterprise risk management, will uncover vulnerabilities.

“The first step is for a business to identify and separate into what their core risk and noncore risks are,” says Todd Belden, president, Cincinnati office, Hylant Group. “A noncore risk would be the risk of product failures or fire. A core risk would be the risk of a supplier going out of business, the credit risk of a customer not being able to pay [or] the human capital risk of an employee leaving.”

With peril lurking around every turn, you may feel overwhelmed. Your insurance broker or carrier can help you analyze how to best prevent disaster. You’re already paying for his or her service through premiums, so including your broker in risk planning is a cost-effective way to bring an expert to your side of the table.

“While not each risk you identify would have an insurance solution, you can at least look at ways to mitigate those risks and, in some cases, avoid it altogether,” Calonge says.

The slumping economy has exaggerated the market for some risks. Strapped with smaller budgets, many CEOs are reducing staff and facing the hazards that come with such measures. Wrongful termination lawsuits can soar during layoffs, and employees who fear they’re next on the chopping block could suddenly fall victim to a fabricated injury.

To protect your business from frivolous claims, consult with your insurance agent and attorney to ensure you are properly covered through employment practices liability and workers’ compensation insurance and that the actions you intend to take are legal. Directors and officers coverage may also be valuable during these times, as executives are forced to make tough decisions that deeply affect the company.

Additionally, you may be interested in credit insurance to keep your business running if your receivables are late. While many carriers have pulled back on providing such coverage, you can still take measures to protect yourself.

“Companies have always had a risk of extending too much credit to their customers,” Belden says. “Today, that’s really enhanced and really becomes more of a serious issue as they’ve leveraged their accounts receivable with their lending institutions. If they haven’t done a good job quantifying what the actual risk is, they could be putting themselves in jeopardy of not being able to collect.”

For each risk area, map out worst-case scenarios to determine which exposures you can tolerate and which components will require more in-depth attention. Once you have pinpointed the most dangerous aspects, you can begin examining insurance policies and preventive measures.

“What types of coverage you need is all about what you can afford,” says Bob Grigas, senior vice president, Wells Fargo Insurance Services of Ohio LLC. “What’s your risk tolerance? What keeps you up at night, and how we can make you sleep better?”

Save money

If you’re concerned about the cost of managing risk, there may be good news on the horizon. A recent survey by the Risk and Insurance Management Society found that the average total cost of risk — which is composed of insurance premiums, retained losses and risk administrative costs — fell 9.4 percent per $1,000 of revenue in 2008.

Still, you can’t afford to pay for coverage you don’t need, so it is imperative to create a risk management plan that works for your company. If you’re willing to put in the time to calculate your options, it’s likely you can save money on premiums and avoid loss events altogether.

While some minimum levels of insurance may be mandated by your state, it’s up to you to decide how much additional coverage you require. By bulking up your policy in areas that are most prone to loss and by peeling back your insurance on more stable items, you can devise a plan that optimizes coverage and minimizes your cost.

However, if you choose to reduce your premiums or take on higher deductibles, you must ensure you have accounted for the potential gaps in your budget.

“All insurance is math,” Grigas says. “It’s expected loss plus insurance company expenses. If you can take a larger deductible with a procedure in place to cover a loss or if you can manage your place better, that’s how you win.”

A common way to reduce risk exposure is to transfer the obligation to a third party, such as requiring tenants to provide their own insurance. You may also want to consider implementing safety measures in your business plan, such as employee workshops. These actions can improve your risk profile and make you more attractive to a carrier — and more apt to get a better rate.

“We see firms that in workers’ compensation have saved literally millions of dollars by implementing good risk management practices, both in terms of direct cost from the employees to indirect costs like morale,” Calonge says.

To ensure you have the proper coverage in the adequate amounts, you should step back and review your strategies at least once a year. It’s recommended that you reanalyze your plan each time a major change occurs, such as a new acquisition or new product.

And don’t hesitate to reach out to your agent or carrier any time you have questions or concerns. Regular discussions help build a meaningful relationship that ensures the broker has your best interests in mind.

In the long run, maintaining a stable partnership with your insurance provider makes sense for both sides: You benefit from receiving better service and pricing, and the broker is saved the time and effort of cultivating new clients.

“You have to have confidence in your broker that they’re able to deliver a good solution regardless of the economy and insurance marketplace,” Belden says.