Managing Risk is Good Business
Managing your business exposure to risk is now more important than ever. Today, even a seemingly minor incident may result in expensive legal action. Careless hiring practices can lead to significant Workers’ Compensation or general liability claims. Routine maintenance and small repair jobs left undone can snowball into major property expenses. Loss of equipment or computer data because of a fire can stop your production or even shut down your business.
With so much at stake, it makes good sense to implement a comprehensive risk management program for your business. An effective risk management program helps you understand and be prepared for the risks you face before losses occur – and that preparation can mean the difference between a profitable or unprofitable business.
What Is Risk?
In insurance terms, risk is the chance that your business will lose money because of:
• Liability for injury or death of employees or other people on your premises.
• Liability for injuries or damage caused by products you make.
• Destruction or theft of property, equipment, machinery, vehicles or other assets.
• Loss of net income through lost sales or extraordinary expenses.
• Anything else that adversely affects the way you do business (such as interruptions to your suppliers due to a natural disaster).
Any single incident can cause multiple problems. For example, a fire at your facility may destroy essential equipment, drive away customers, damage a neighboring business, and injure or kill an employee.
Why Manage Risk?
Why manage risk? The answer is simple – to protect yourself and your business against unforeseen hazards as well as the routine risks your workers face every day. An hour of risk management effort will typically yield a greater return on investment than an hour pursuing new business. Why? Because good risk management addresses factors that you can control, such as employees, materials, operations, facilities, processes and vehicles. On the other hand, prospecting for new business requires that you devote effort to a factor that can’t be controlled-potential customers who may or may not need or want what you have to offer.
Good risk management doesn’t have to be expensive or time-consuming. You can take simple steps right now to protect your business. This Risk Management Guide, provided as a service of the Small Business Administration and The Hartford, offers detailed checklists to help you identify and control common hazards in your business. Although this guide covers many risk management issues common to small businesses, it may not address all potential hazards. If you have specific concerns or legal issues, we encourage you to obtain assistance from your insurance representative, agent, or attorney, or from appropriate local, state and
federal agencies.
Approaching Risk Management in Three Ways
You can manage your business risk in three ways. You can finance it by buying insurance and retaining some of the risk yourself through deductibles; you can transfer it to others; and you can control it through a risk management system. An effective risk management program incorporates all three elements.
1. Finance Your Risk: Purchase adequate insurance to transfer financial responsibility for losses to your insurer. Obtain enough insurance to cover all your risks.
• Know Your Insurance Policies. If you don’t know which perils your policies cover, you may be in for a surprise when losses occur. Review your policies with
your independent insurance agent, and if necessary purchase additional coverage to ensure that your business is fully protected.
2. Transfer Your Risk: Where appropriate, transfer the responsibility for risk to your lessors, vendors, subcontractors, competitors, and even your customers. You may be able to transfer risks to others in many ways.
• Lease Business Property and Equipment. When you lease rather than own your property or equipment, you may be able to transfer property and liability
risks in whole or in part to the lessor.
• Use “Just-In-Time” Delivery. When you require vendors to store merchandise and materials at their sites until you need them, you lower your risk significantly, because the goods arrive on site at the time they are required, not before. If you are in the packaged goods trade, ask your supplier to drop-ship merchandise directly to your customers; this will further reduce your risk. Of course, these options depend on the nature of your business and are not recommended for time-sensitive deliveries where late arrivals may adversely affect your business or your relationships with your customers.
• Transfer Risk to Your Customer. Talk with your lawyer about ways to transfer ownership – and risk – of goods that have been sold to a customer but which
remain on your premises. Look carefully at the warranties you issue to your customers to be sure that you are not unnecessarily increasing your risk.
• Hire the Right Subcontractors. You can reduce your Workers’ Compensation risks by employing knowledgeable, adequately insured subcontractors. When you use properly insured subcontractors to perform services or to supply parts for your products, you can minimize high-risk product liability exposures. Require your subcontractors to supply Certificates of Insurance to verify that they have adequate insurance.
• Consider “Hold Harmless” Agreements. Consult your lawyer about these contracts that shift legal and financial risk from you to another party.
• Decline Risky Business. Let your competitors take the chances on potentially dangerous projects or ventures.
3. Control Your Risk: Take a close look at how you do business. Assess your equipment, facilities, employees, processes, products, and services. Each factor is an
essential part of your business. Now imagine what might go wrong with any one of these, and take steps to prevent problems. Take advantage of the excellent loss
control services provided by many insurers. They can help you identify and control risks at your business.
Getting Started With a Risk Management Program
Because everything in your business is vulnerable to multiple hazards, starting a risk management program may seem like a huge task. But if you approach the project in chunks, it will not seem so large. Using the checklists provided with this guide, start by assessing your overall risks. Then focus on the two or three issues that seem most hazardous, or that pose the biggest risk to the success of your operation.
Consider asking a friend who is not in your business to conduct the survey with you – someone who can look at your business with the “fresh light” that may be hard for you to have on your own. You may be able to trade off assistance with a neighboring business owner.
The Essential First Step – Management Commitment
The success of your risk management program depends on strong commitment from management to provide the resources, interest, leadership, and continued support to implement and continue a company-wide program. Examine your operation and note anything that could cause damage, injury or loss. Involve your employees; they are sure to have good ideas about how to protect your business.
Other Steps in the Risk Management Process
• Review your insurance protection. Review your property insurance program with your agent to be sure you understand what is and is not covered. Make sure that all properties are actually on the property schedule if you have blanket coverage, and ensure that your property is adequately insured to replacement value.
• Consider loss control an operating issue. Adopt a policy that defines accidents, incidents and insurance losses as operating problems and treats them in the same manner as any other operating problem which hinders productivity and profit.
• Make it someone’s job. Assign a responsible employee to identify and control hazards at your business. Provide the right training, motivation, support, and resources to help this person succeed.
• Identify hazards. Identify hazards and dangerous conditions in your business. Examine what happens minute-by-minute at your business. What happens when
a customer comes into your office or plant, when your employees manufacture products, or when they provide services or make deliveries? Understand each step of
each process, and consider what could happen under any of these circumstances.
• Put a plan in place. Create a plan to minimize or avoid the hazards and dangerous conditions you have identified.
• Monitor your success. Monitor the progress of your risk management program, and seek ways to improve it. Reinforce your employees’ participation in, and individual responsibility for, the overall risk management effort.
Most businesses face risk management concerns in seven areas: Property, General Liability, Product Liability, Computers and E-Commerce, Disasters and Business
Interruption, Workers’ Compensation, and Motor Vehicles.
Use the checklists here to assess how well you’re prepared to stay productive and in business. While these checklists will help you identify your exposures, of course they do not cover every possible risk in your business. We encourage you to add any areas of special concern to your business to enhance the effectiveness of your risk management efforts.
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