Risky business 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.

“Going back to the economy, it’s huge for our customers today,” says Kelly O’Leary, senior vice president and Pennsylvania regional manager, Chubb Group of Insurance Cos. “They really need to have a strong handle on the exposures that they have. By putting the proper insurance program in place, it can help them alleviate any financial hardship they may encounter if it’s not properly managed through an insurance mechanism.”

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.

“Insurance obviously plays a key role in helping companies transfer the risk that they are unable or unwilling to avoid or self-assume,” says Steven J. Reiss, senior vice president and regional executive officer, Mid-Atlantic region, ACE USA. “A comprehensive approach to risk management really calls for an insurance program that is highly customized and tailored to an individual company’s risk exposures and their own individual tolerance for assuming some of their risk.”

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.

“Risk management is a daily requirement of running a successful business,” says Robert Ivey, Pennsylvania regional vice president, property and casualty insurance, The Hartford Financial Services Group Inc. “As your business grows and develops, you should be engaged regularly with your insurance carrier and agency to make sure products and services provided by your carrier address the needs of your business.”

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.

“There are both new risks and risks that have become more significant as a result of an economic downturn,” Reiss says. “But the changes in the economy may have a very different impact on different types of businesses, so it really has to be a case-by-case review.”

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.

“Insurance coverages that businesses are starting to explore now due to the economic situation include employment practices liability and directors and officers liability coverage,” O’Leary says. “Also, business owners might be buying increased crime insurance limits because they feel they have a greater exposure. These are the coverages that insurance carriers are really talking more with customers about today.”

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.

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.

“Risk management does not always mean a cash outlay; it could be as simple as setting a tone of safety with employees that leads to a safer work environment and lower workers’ compensation losses,” Ivey says. “Your insurance carrier can assist, along with your agent, with developing a risk management plan.”

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.

“What you find is the insurance carrier and the company get to know each other much better,” O’Leary says. “We have a stronger understanding of the company’s operations and what their needs are both from a service and coverage standpoint. A long-term relationship helps the carrier look to the customer’s future needs and, perhaps, design a service for the customer or modify their coverages in a unique way.”

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