Insurance is an important aid to commerce, industry, and private citizens, alike. Every small business, large enterprise, or individual can develop a substantial number of risks and uncertainties throughout their life and growth cycles.
It may involve the risk to:
- a premises or home
- a plant, machinery, or automobiles
- raw materials or precious metals
- other tangible assets
Property, goods and personal possessions may be damaged or destroyed due to:
- Lightning or fire
- Hail or windstorm
- Damage caused by aircraft
- Riots or civil disturbances
- Smoke damage
- Damage caused by vehicles
- Falling objects
- Volcanic eruption
- Damage from the weight of snow, ice, or sleet
- Water damage from plumbing, heating, or air conditioning overflow
Many of these risks can be avoided by using industry proven techniques known as Risk Management. The process of risk management includes the practice of identifying and analyzing your exposure to loss and taking steps to minimize these exposures to levels acceptable to your company or you personally. This often involves methods or procedures that require direct insurance.
There are five basic types of risk management techniques that can be used to handle your exposures to loss. These include:
- Loss Avoidance – This technique involves making a decision to not engage in any activities that expose you to losses you do not wish to assume. Basically, this means you avoid or eliminate certain activities so that there is a zero chance of a loss occurring in conjunction with those activities.
- Loss Prevention – This technique includes those steps taken to reduce the probability or frequency that loss will occur when engaging in a particular activity. Simply, prevention reduces the likelihood of a loss occurring, while still allowing you to engage in that activity.
For example, developing a strict safety policy and enforcing a strict safety program that requires preventive maintenance and safety checks on machinery and vehicles helps reduce losses caused by defective and poorly maintained equipment. Most companies have a safety policy, but results come from the enforcement of the safety program that supports that policy.
- Loss Reduction – This technique tries to reduce the size and severity of a loss.
For example, fire sprinkler and suppression systems reduce the size and severity of damage to your building and its contents if a fire loss were to occur. There is always tremendous liability associated with property fires.
- Loss Retention – this technique deals with the percentage of loss, in dollars, you can retain without creating undue hardship. In general, the larger the positive cash flow of both organizations or individuals, the larger the loss (or risk) they are able to assume.
Deductibles are the simplest example of retaining risk. If you consistently have large cash reserves from income, it may be in your best interest to have a larger deductible, which reduces your annual insurance premium. This means you may be responsible for the first $1000, $1500 or $2500 of damage to your insured property. Your qualified insurance adviser helps analyze the cost savings, in premium, determining if there is a reasonable benefit to taking a larger deductible versus establishing a smaller deductible and retaining less risk.
- Transfer of Loss to Another – This final technique involves purchasing various insurance policies to cover your specific exposures to loss. This can also mean transference through indemnification or “hold harmless” provisions in a contract. This would include shifting a particular loss exposure to another party, as well as your assuming loss from another party, under the terms of a contract you enter into.
The most common instances of hold harmless agreements are those used by General Contractors with their many subcontractors. Subcontractors are subject to the General Contractors dictated limits of insurance that cover the potential losses due to accidents, shoddy workmanship, or unforeseen delays in completing their portion of a project.
These five principles of risk management are designed to employ the best methods possible to eliminate, prevent, reduce or transfer your risk exposure and avoid losses. Many risks can be avoided by implementing timely precautions, but some are just unavoidable, and beyond the control of a business or property owner. These unavoidable risks should be protected by insurance.
If your Risk Manager or Insurance agent isn’t talking to you about these principles of risk management, I am available to have that conversation with you to verify there aren’t gaps in your insurance portfolio. Get a “second look” for free. I live insurance and believe in the work I do for my clients. I’ll earn your trust, every step of the way!
Next: Specialty coverages that can maintain your company’s solvency!