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.

“A lot of it is common sense; you have to figure out what your insurable risks are and what risks are better handled through other methods,” says Roger Kozberg, managing director and executive vice president, HUB International Services Inc.

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.

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.

“Today, more than ever, I think it is important for corporations to involve their brokers in determining what exposures they are facing,” says Bill Blake, southwest regional executive, Zurich Financial Services. “Brokers add a lot of value in helping the customer and general public understand better what’s going on in the local legal climate.”

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.

“If you have someone whose back has been hurt and they sense a layoff coming, they may decide that now is the time to make that back claim,” Kozberg says.

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. You can still protect yourself by running credit reports on customers and reducing the amount of debt you take on.

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.

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 is 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 out-of-pocket 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.

“Investing in safety, regardless of what your business is, to avoid loss is probably the most effective, cheapest way to manage your long-term insurance costs,” Blake says.

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.

“Every dollar that you spend or lose in risk — a dollar that you pay for insurance or comes from an uninsured loss — comes right from the bottom line,” Kozberg says. “If your profit margin is 20 percent, you’ve now got to sell $5 worth of stuff to make up for that dollar you lost. Absolutely every dollar you save in risk goes to the bottom line.”

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.

“I recommend that any time you’re thinking about something new or different, you want to think about what the risk management implications are and talk about that with your broker,” Kozberg says.

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.

“The relationship with the insurance carrier is very important,” Blake says. “If we have a good relationship, we understand the operation better, the people better and we develop a deeper connection. We treat them less like a buyer and more like a partner.”