Is Insurance Enough?

How to broadly manage business risks

Most business owners think of risk management too narrowly.  Risk management is practiced as a financial exercise which leads to the purchase of insurance.  And there are many types of insurance available to businesses which can cover a range of policies such as general liability, real property, business interruption, key man life insurance and even environmental or Directors & Officers coverage.  Any or all of these policies may be necessary and worthwhile for a business but the owner should think more broadly about risks.

In general, risk management is a process to assess, control and monitor business activities in order to minimize the effects of risk on the company’s solvency and performance.  It can also maximize short and long term value for the business owner.

There are 4 basic types of risk to consider:

  1. Hazard (eg. Personal injury, property damage)
  2. Financial (eg. Profit, cashflow, capital)
  3. Operational (eg. Projects, human resources, safety & health)
  4. Strategic (eg. Brand, reputation, growth)

There are 5 generic responses to a risk:

  1. Avoidance
  2. Reduction
  3. Alternate Actions
  4. Share or Insure
  5. Accept

A business owner should complete an annual risk review which identifies the key risks applicable to his / her business.  These risks need to be assessed and action plans should be considered as to how best they can be dealt with.  And, some items will need to be monitored and updated to check progress or changes.

The better the risk management process, the better the results will be for the business over time.  In fact, superior risk management can separate a business from its competitors and enhance the value of the company.

Insurance can be an effective option to manage some business risks but it is not enough to manage all business risks.