How Safe is Your Business?
Companies using risk management plans to protect bottom lines
For many businesses, risk management is somewhat of an afterthought. Until something bad happens, company owners may not consider the idea of protecting the business from loss to be of primary importance.
“Risk management and loss control can have huge implications in protecting a business and its bottom line,” says Christopher S. Pobieglo, president of Business Insurance Associates. “The reality is that a business can get probably away for a few years without risk management controls in place, but sooner or later, something is going to happen. A business owner can do everything right for 20 years, but one uninsured claim can run into the millions and wipe out 20 years of work.”
Risk management is generally defined as the process used to decrease exposure to, and provide protection from, risk. While some companies have their own in-house risk managers, others may look outside to hire professionals to help them determine potential losses. “There are many types of risk; anything from transportation and vehicle risks to the loss of key people, owners or customers,” explains Dan Crawford, president of Pippel Insurance Agency. “There is also the potential of risk to real property, including buildings, their contents and data. Business owners need to look at the big picture to determine what could cause physical or financial risk to themselves, their lives and their businesses.”
Creating a Risk Management Program
The first step in any risk management program is to identify the risks that a business faces. “If you don’t identify the risk, you can’t develop strategies to deal with it,” explains Pobieglo. “You don’t need to make judgments at this time about how severe or unlikely the risk is; you want to list anything and everything, no matter how remote.”
Businesses should then quantify each risk by its frequency and severity. “How often could this risk happen and what would be the consequences?” asks Pobieglo. “Business owners should assign a value to each risk, and then determine strategies to address these risks.”
Strategies can take a number of forms from buying insurance to creating an employee safety plan to carefully scrutinizing contracts before they are signed. “You want to set up ways to control what you can; for example, the owner of a tourism company can minimize his transportation risks by not flying clients in bad weather,” explains Crawford. “After mitigating what risks they can, companies should then decide how to handle the risk that is left, and create a general plan for risk administration in order to monitor the results of the steps that they are taking to minimize loss.”
According to Parker Smith and Feek Principal and Vice President of Risk Management Consulting Lynne Seville, there are numerous ways that companies can mitigate risk. “One option is to transfer risk to others, for example, though a contractual transfer. A building contractor might choose to reduce their risk on a project by pushing it on to a subcontractor or choose to not accept certain risks from the owner. When making a contractual transfer, it’s important to make sure that the person assuming the risk has the resources to pay for the loss, however; the contract might indemnify you, but the indemnitee needs to have the wherewithal to assume the risk and the financial resources to pay for the loss.”
Another option available to business owners is to finance risk by setting aside money or buying insurance to deal with potential claims. “While you can elect to transfer a certain amount of risk to insurance, some risks can’t be transferred or are too expensive to transfer because the premium doesn’t justify the nature of the risk,” says Pobieglo. “While some businesses feel that they are covered because they’ve purchased insurance, it is really just one of a number of different strategies that they should be using.”
Risk Management Resources
One of the reasons that many businesses do not have a risk management program in place is because, frankly, it can seem overwhelming. Considering every worst-case scenario—and putting strategies in place to deal with each—can be time-consuming and confusing. But what does it cost a business to ignore this issue?
“This is one of those things that is hard to quantify; how do we measure what we prevented? How do you measure what didn’t happen?” she asks.
“A business can throw caution to the wind, but they will only be lucky for so long; they will have claims and losses over time,” she adds. “And these claims can range from a few dollars to millions of dollars.”
In addition to specific business losses, a company without a risk management program in place can also be affected negatively when trying to buy insurance. “The market is hardening and pricing is increasing in Alaska,” says Seville. “A company with a track record of claims will find that it drives their premiums up; even if they’ve managed risk on a basic level, they will have to step up what they’re doing to even get insurance providers to talk to them.
“Litigation is also a concern for businesses that are not controlling their exposure to risk,” she adds. “Damage awards can be devastating to a business; a good risk management plan can help a business avoid getting sued or at least provide some defense in litigation.”
The lack of a risk management program can even prevent a company from getting new business, according to Pobieglo. “If Contractor A is bidding for a job against Contractor B, and Contractor A has lost his workers’ comp carrier because of a poor loss history, it can threaten the very viability of his business,” he explains. “By going through the state-run pool for workers’ comp, Contractor A has to pay a surcharge of 25 percent on all premiums over $3,000, which directly affects his overhead and in turn, his competitiveness and his ability to get new clients.”
There are a number of resources to help business owners learn more about risk management. Certified risk managers have completed additional schooling in this area in order to be able to provide professional counseling on ways to cut down on loss. Different industry professionals, such as insurance brokers and insurance carriers, have years of experience in claims and loss management, and financial advisers and CPAs can often provide insight into risks that can affect a business’s cash flow and bottom line. “Some industries have specialized risk management certifications, like those in the banking, health care and hospitality industries,” says Seville. “Other businesses can also take advantage of governmental offerings, like counseling provided by the Small Business Administration.”
Businesses might also be able to get access to pre-made risk profiles that have been put together by experts in different industries. “Insurance brokers have access to risk management checklists and loss control ideas that have been generated for very specific types of businesses as a result of years and years of insurance claims,” Pobieglo explains.
“Typically speaking, a business does want to work with someone who has a certain level of expertise in this area; some companies, like ours, specialize in certain niches like construction, architecture and engineering, nonprofits and Native corporations,” he continues. “Check with trade associations or gather word-of-mouth recommendations from within your industry, and don’t be afraid to interview different brokers.”
Having the right risk manager in your corner can make a big difference to a business’s success. “One of our clients was having workers’ comp issues that were driving up his costs,” says Crawford. “We sat down with him and talked about being more careful in hiring, having safety meetings and making sure to address the different issues that the company was having during these meetings. Once he started doing this, the client was able to bring his workers’ comp pricing back down to where it should be for a savings of more than 40 percent.
“Even small changes can make a difference—incidental things like putting rubber mats down where restaurant workers do food prep can prevent back issues, which cuts down on workers’ comp claims,” he adds.
While some companies may avoid looking at the risks that their businesses face, that type of mindset may be the biggest risk of all. “Risk management is really the art of looking at the big picture to see what you can do to minimize any type of loss—it’s something that most people do every day,” Crawford surmises. “Things like checking the furnace or making sure the stove burners are off to prevent a possible fire—that’s risk management.”
Vanessa Orr is the former editor of the Capital City Weekly in Juneau.
Posted: May 1, 2013