Business exposure Featured

8:00pm EDT August 26, 2009

This economy probably has your company facing heightened risks — risks that you might not be prepared for and that could ultimately cripple your business.

The global economy is the No. 1 risk businesses say they face today, according to the Aon 2009 Global Risk Management Survey. But the survey points out that less than 66 percent of respondents have formally reviewed their major risks or have plans in place to deal with them, including the economic downturn.

Now is a crucial time to have a detailed risk management program in place. After all, budgets are tight, you’re looking for savings and managing risk can directly influence your bottom line.

“(Managing risk) gives you a lot more control over your bottom line outcome if you are acutely aware of what your risks are that you face every day and you have a clearly communicated strategy across your organization to deal with those risks,” says Colin MacNab, vice president, MJ Insurance Inc. “It can help eliminate surprises that can impact your bottom line negatively.”

Hiring an in-house executive to focus on risk may financially be out of the question. But a good insurance broker can help you put the puzzle pieces in place, starting with the questions that will lead to true solutions.

Identify potential exposure

Like anything in business, a true commitment to risk management starts with the company’s leadership. Set aside time for your organization’s key players to sit and outline the different risks you might face, such as financial, property and casualty, and legal.

There are a number of assessments you can do — such as risk mapping or enterprise risk management — depending on the amount of detail and commitment you want your program to include. Regardless of what direction you are going, you should include your insurance broker in the conversation. Odds are his or her experience, benchmarking data and outside eye will lead to valuable questions. A good broker has dedicated risk management and claims services and will go through a checklist that will bring your risks to light.

Once your risks have been identified, your broker can help you develop a strategy to quantify your risks and determine whether you should mitigate or transfer the risk.

“There are a number of different tools that can be used for companies to better understand their exposures, and once they understand exposures, they can then determine what the impact of those exposures would be to their company and their bottom line,” says Tom Breiner, managing director and head of the Indianapolis office, Marsh Inc. “An effective assessment process will also help them determine the types of insurance they should carry and the amounts of insurance they should purchase.”

The process is fairly systematic, but it’s also continuous. A true risk management plan involves constant monitoring. It’s worth the effort to work with your broker to match a timeline of monthly musts with your plan. Especially in volatile times like today, your company could face different risks than it did six months ago.

“Although an insurance program may be adequate when it is first delivered, changes in the legal and business climates may cause the coverage to become inadequate as times change and the environment evolves, creating new exposures and challenges,” says Roy Geesa, senior vice president and manager of commercial sales, Gregory & Appel Insurance.

Review risks

Your risk analysis is a great guideline for your specific needs, but there are a few areas of coverage the economy has made more relevant. And today’s evolving risks can be enhanced by geography and industry.

“In the state of Indiana, we clearly have been hit by the economy especially in the manufacturing sector, so there have been a number of risks that have become more significant in this day and age,” Breiner says. “A lot of those relate to business continuity and supply chain exposures, related to the potential insolvency of trading partners.”

Business interruption and trade credit insurance are two areas to review. If a client can’t pay or your operations are halted, how will those scenarios affect your balance sheet if you’re already strapped for cash?

Insurance executives are warning that desperate times produce desperate people. If you’ve decreased your work force or plan to, keep in mind workers’ compensation and employee discrimination claims tend to rise in a down economy, as do employee crime and cyber theft. Now might be a good time to evaluate directors and officers coverage, employment practices liability insurance, crime insurance, cyber insurance and workers’ compensation coverage.

“As the economic situation squeezes employers and as employees are faced with uncertainty, certain areas deserve special attention and certain housekeeping procedures can help reduce your insurance expense,” Geesa says.

Find cost-saving solutions

Insurance is one line item that hasn’t been immune to budget cuts. But before you start scaling back coverage, keep this in mind: We’re still in a soft commercial insurance market — meaning insurance is a cheap form of risk capital.

A 2009 benchmark survey by the Risk and Insurance Management Society Inc. shows a lower average in premiums contributed to a 9.4 percent drop in the average total cost of risk per $1,000 of revenue.

If you’re worried about the size of your insurance allotment, call your broker now, review your contracts and review your risks. You don’t have to wait until your renewal in order to find savings or renegotiate your contract. Just remember, before you can responsibly lower costs, you need the details of what you are and aren’t covered under.

“People worry about being overinsured, but it’s scarier to be underinsured,” MacNab says. “I think in today’s economic climate it’s a good exercise to go through and really analyze the coverages and see if there are any that could be scaled down if cost savings is important.”

Immediate savings can be found by passing risk to others, such as tenants or vendors. You also can play around with increasing deductibles to lower premiums or scaling back nonmandatory insurance. If the latter two are options, first weigh whether you can financially assume the risk or if the cost of managing the risk is cheaper.

One of the only ways to decrease the costs you can control is by reviewing your claims. You should have regular claims review meetings with your broker to see where prevention methods can be put into place. Your insurance carrier can help with loss control, such as safety training.

Some brokers say clients recently have seen cost savings of 20 percent.

Part of the answer is building a long-term relationship with your broker and even carrier. Share with them details of your operations. Invite them to tour your facility. The more your broker understands your business, the better he or she will be able to provide holistic advice. And a lasting relationship with an insurance carrier can mean more flexibility and negotiation.

In the end, it’s your choice as to how comfortable you are with your risk.

“That’s part of the discussion, understanding well how much (does) the insurance costs and is that a good investment, is that a good use of our dollar to transfer the risk,” MacNab says. “And honestly the answer to that question is very personal. It depends on the individual business and the people running that business and what their real appetite for risk is.”