What is Risk Management and How Can it Help Your Business?

What is Risk Management and How Can it Help Your Business?

Risk Management plays a critical part of every business. Whether it is implementing a safety program, making sure our policies are correct and up to date, or tracking key indicators. We are all engaged in it at some level.

 

I want to step back from just the insurance side of Risk Management for a moment and take a broader look at it all. Insurance is after all just a mechanism for helping to manage to risk but it should just be a part in the overall system.

 

Whether your business is a Law Firm or a Construction Company, a start-up or a multinational organization, the principles are the same. It is just applied at different levels and in different areas.

 

Identify: This first step is the most crucial. You cannot protect your business against something that you didn't know existed. Every method of Risk Management depends on this step. If it is not done correctly then holes in the Risk Management Program will appear and are often the most devastating.

 

Analyze: The goal of this step is to determine what the potential impact will be on the business. We want to know how much risk is posed to physical property, potential liability, employees, and the loss of net income.

 

Financing: Once it is determined how much, we can start to focus on the how. So we look at our list of Risk Management Methods.

 

  1. Retain: A business can choose to finance risk in house. This keeps the money in the business and can be an asset. Deductibles are a very common form of retaining risk. A warning though, retaining or tolerating risk without the financial capacity is an empty promise.

  2. Reduce: This is a common though under utilized method of risk management. Safety programs, policies and procedures, best practices standards exist in almost every organization. However, most of the time they are not utilized to their full potential. (Another article on the benefits of Risk Reduction is in the works)

  3. Spread it out: Spreading of risk usually means spreading it out over a geographic area, not having all inventory or equipment in one place or spreading out manufacturing capabilities over different areas. It can also mean outsourcing or hiring sub-contractors.

  4. Transfer: This is involves transferring the risk to another entity who has the capacity to accept it. The most common form of risk transfer is purchasing insurance but it can also be done through contracts and hold harmless agreements.

  5. Avoid:  At the end of it all, some risks or just not worth taking. When the benefit of taking the risk is outweighed by the cost, the best method of risk management is to avoid taking that risk.

 

Administration: At the end of it all it is not enough to just put these in place. A business has to constantly assess how it is doing and make corrective action when something is found to be out of line. Having a good system set up to accomplish this is critical to the Risk Management Program reaching its intended potential. 

This is all done with the goal of gaining an understanding of your business’s risk profile and how it affects the overall health of your business. It also helps to avoid costly fines by regulatory agencies such as OSHA and the OCR. It also helps to stay compliant with laws such as HIPAA and GLBA. 

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