For any organization to appropriately manage the risks involved with being in business, the management has to be more than simply renewing insurance policies. Yes, your insurance is always a key part of any risk management strategy, but there is more than one piece to the puzzle.
To properly approach the task of risk management, the first thing that has to happen is the identification of any existing risks that can jeopardize your business financially. Although simple to say, this task can be difficult. After all, risk management involves predicting the future based on past experience and expertise. A risk manager must look to their key employees and management staff for insights and look externally to professionals you trust and other specialists.
Before the risk management strategy begins, the organization will need to determine how much risk you're willing to afford and accept, or your "risk appetite." After which you'll need to identify the measures the organization currently has in place and what is still needed in order to help manage the risk. Once the risks have been identified and prioritized, the organization will then determine how they should be managed. There are three options to consider:
1. Avoidance - Avoidance is when the organization decides not to embark on a certain activity because the risks exceed the expected benefits
2. Acceptance - Acceptance happens when an informed decision is made to accept a potential risk because the benefit is significantly greater than the risks.
3. Transfer - This takes place when the organization elects to transfer the risk to a third party insurance company or by contract with a non-insurance organization, however, when transfer is elected, it is typically not 100% because of the deductibles involved
When risks are transferred to an insurance company, the deductibles act as a motivator because the insured will typically attempt to reduce the risk because of their responsibility to accept a portion of it. For example, if your business that is acting as a General Contractor, requires all subcontractors to obtain and pay for their own insurance, the subcontractors are motivated to reduce risks that could result in a claim where they will have to pay deductibles out-of-pocket.
In cases where a General Contractor is purchasing Wrap-Up insurance that covers the General Contractor and its subcontractors, the limits and deductibles will be significantly higher which increases the exposure for the General Contractor. As the general contractor, your deductible responsibility would could be increased to $50,000 or $100,000. Knowing this, you could build this risk into your project bid or transfer it to your insurer who could pay the difference between your chosen deductible and the higher deductible under Wrap-Up policy.
Every industry contains unique risks and exposures that must be properly managed to avoid the inherent financial consequences that can result. It's important for the risk manager to be able to call on experts in the industry to define and ultimately mitigate them. After implementing a comprehensive quality assurance and safety practices program that are targeted to minimize the identified exposures, the risk manager can make an informed decision to avoid, accept, or transfer the risks that remain.
For professional advice about your organization's exposures, contact Skyline Risk Management, Inc. (718) 267-6600 for help with identifying your exposures and how to mitigate them in the best possible manner.