How a Risk Manager can use Insurance in Risk Management Strategy - Essay Example

How a Risk Manager can make optimal use of Insurance as part of an overall Risk Management Strategy : How a Risk Manager can make optimal use of Insurance as part of an overall Risk Management Strategy Introduction Risk management refers to a systematic process by which the risk manager identifies and assesses company risks and takes appropriate action to cushion or protect the company against them. It could also mean the possibility or chances that a future occurrence may cause losses or harm to a business organization (Iverson 2013, p. 2). It is imperative to note that risks may also provide possible opportunities. A company can sometimes accomplish considerable gains by taking risks. However, companies need effective risk management strategies to assess and analyze potential risks in order to balance possible losses against potential gains. A considerable number of companies have lost equipment, buildings, and materials to natural disasters. In addition, many companies have lost human resources, as well as revenues as they could no longer manufacture goods and services. The four leading strategies for risk management include risk financing, loss reduction, loss prevention, and risk avoidance (Iverson 2013, p. 2). Even though some businesses can assume, reduce, or even avoid certain risks, few business organizations can fully protect themselves without purchasing insurance. Overall, a risk manager can effectively make use of insurance as part of a general risk management strategy to ensure sustainability and profitability of the business. Using Insurance as part of an overall Risk Management Strategy Most companies greatly benefit from taking their risks into consideration when they are performing extremely well, as well as when markets are rapidly growing. Accordingly, the companies can sustain growth and profitability (Andersen 2010, p. 1). A risk manager plays a vital role in predicting and enacting measures that would help prevent or control losses within the company. The process of risk management involves identifying various exposures to potential losses, measuring the exposures, and making an informed decision about the most suitable approach to protect the company from losses or harm, considering the nature of the risks and the goals and resources of the company (Andersen 2010, p. 1). Some risks are more important than others. Therefore, the risk manager must determine the importance as well as ability of each risk while identifying and evaluating exposures. The goals and resources of a company are vital to selecting the best method for preventing or controlling risks. However, the risk manager must monitor the method already selected and implemented to ensure that it generates or produce the projected outcomes. In general, company risks fall under five broad categories namely business risks, market risks, credit risks, operational risks, and legal risks (Andersen 2010, p. 1). Environmental risks also constitute a significant area of risk management in contemporary business world. The intensity and number of natural disasters are increasing. For instance, a tsunami and three hurricanes hit the state of Florida in 2004 causing death and devastation. Global warming has largely contributed to the rising number of natural disasters and catastrophes across the United States and other countries worldwide (Andersen 2010, p. 1). Climate scientists and environmentalists believe these natural disasters will, in the future, cause greater droughts, floods, and storms. Online business activities have played an integral role in advertising products/services, communicating more effectively with employees, and maintaining as well as strengthening relationships between companies and their customers or even suppliers (Damodaran 2008, p. 8). However, increased dependence on the Internet has subjected many business organizations to various security risks and liability issues. Meanwhile, the risk manager must examine the insurance policies, loss history, expenditures, and other aspects or areas that point to potential risks when the company buys another organization (Damodaran 2008, p. 8). Similarly, risk managers can potentially help in alleviating possible harm and losses resulting from mergers. Incidentally, risk managers became an integral part of the acquisition and merger teams of companies in the 1990s. Insurance policies are vital for controlling potential risks. A risk manager could consider obtaining new insurance policies as part of the company’s long-term risk management strategy to cover potential risks. Modern insurance policies often provide coverage against financial risks or losses associated with currency fluctuation and corporate profits (Damodaran 2008, p. 8). Besides, the policies guarantee the company a minimum level of profits even under irrepressible circumstances such as the economic downturn and natural disasters. The nontraditional insurance policies will also ensure profits, particularly if the company is doing business in international markets (Damodaran 2008, p. 8). Nevertheless, risk managers should start focusing more on the process of verifying compliance of their companies with federal, as well as state regulations. For instance, risk managers should assess various environmental risks, including those arising from environmental liability, pollution, and waste management to enhance profitability and competitiveness of their companies. Meanwhile, insurance is arguably the most effective and reliable method of risk management. Insurance policies would effectively cover property risks, liability risks, and transportation risks. Property risks include fire and natural disasters (Marcinko 2005, p. 5). A business organization could lose property (physical property) such as equipment, materials, and buildings in case of a fire breakout. Such companies could end up losing revenues because they can no longer produce goods and services. The company could also lose important human resources due to massive injuries or death of an employee. On the other hand, liability risks include workers’ compensation and employer’s liability (Marcinko 2005, p. 5). Meanwhile, transportation risks cover land, sea, and air travel as well as transportation liability and transported commodities. A company’s risk manager might resort to acquiring services of an insurance provider to cover all or part of the potential risks. Risk management strategies should be systematic and regularly reviewed. Insurance is particularly vital for managing major risks. A major risk refers to a type of risk that has a high likelihood of occurring (Marcinko 2005, p. 5). Major risks have costly and severe impact on the day-to-day operations of the company. Furthermore, they immensely impede achievement of objectives and aims of the company. They could also damage company’s reputation in addition to changing how major stakeholders, customers, employees, the management, or sponsors deal with the company. A risk manager would examine and carefully choose the right insurance policy (or policies) to transfer the risk of potential loss to the insurance provider. However, the company must pay a fairly small premium to the insurance provider for protection against the possibility of the business enterprise incurring and sustaining a much bigger harm or financial loss (Longenecker 2012, p. 684). The risk manager facilitates the process of insuring the company against potential risks such as theft, natural disaster, fire, automobile accidents, legal liability, and the disability or death of key employees. In essence, the insurance policies would protect the company from the potential financial consequences due to events that could reduce profits, disrupt operations, or cause the company to go bankrupt. Insurance will particularly help small businesses be successful against a backdrop of uncertainties under which they operate (Longenecker 2012, p. 684). In addition, insurance policies shift the potential economic burden to the insurance provider. Therefore, managers of the company can fully focus on running the day-to-day operations of the business. Incidentally, several large corporations often employ services of a permanent risk management specialist. The specialist would help the corporation in identifying and developing suitable strategies to deal with the potential risks (Longenecker 2012, p. 684). Companies seeking insurance cover should identify the major areas of exposure to harm or risks. A risk analysis questionnaire or survey (usually available through agents and insurance companies) is a useful tool in the identification of main areas of exposure (Berwick, 2007, p. 8). The risk manager will then assess and evaluate the prospect or likelihood of each risk and determine the severity of potential losses associated with it. Most business organizations encounter common types of risks such as legal liability for products, property, or services; property losses, illness, injury, death, or disability of key employees. A business organization may also suffer disruption and interruption of normal operations dues to occurrence of the risk. Each insurance cover would manage a corresponding category of loss. For instance, the risk manager may consider insuring the company against property losses. Apparently, property losses can befall any organization (Berwick, 2007, p. 8). They include physical damage, loss of use, and theft. Physical damage could occur because of accidents, fire, vandalism, or severe weather. The risk manager should the potential for loss or damage to the building or its contents when exploring the risk of property damage. For instance, a retail business might lose costly inventory in fire or flood. In the same way, a manufacturing corporation might lose valuable raw materials in accidents or severe weather (Berwick, 2007, p. 8). On the other hand, criminal activities such as theft could lead to losses. For example, burglary as well as unauthorized activities or practices of company employees, including forgery, embezzlement, and fraud may prompt the management or risk manager to purchase an insurance cover against theft. Conclusion In summary, every company should purchase a fairly comprehensive policy that covers against all potential risks. For instance, a comprehensive insurance policy helps a business organization to avoid loopholes in coverage as well as shunning the extra expense of duplicating insurance coverage (Iverson 2013, p. 2). Such coverage will also assist in the speedy settlement of claims. Meanwhile, the company would still require additional insurance to cover a particular disaster or calamity sufficiently. Small business enterprises may improve the rates of their property insurance by adopting copious safety programs and measures. Moreover, the risk manager could also utilize the two forms of legal liability (general liability and product) to fully cover the business and its employees from injuries or accidents, customers, vendors, and managers on the premises (Iverson 2013, p. 2). For instance, a company is usually legally accountable for knowing if the services or products it offers are substandard. Lastly, the risk manager and top executives should consider purchasing insurance policies to cover workers’ compensation, company automobiles, business interruption, business opportunity plans, and e-commerce insurance. References Andersen, T. J. (2010). Strategic risk management practice. Cambridge University Press. Berwick, G. (2007). The executives guide to insurance and risk management: taking control of your insurance programme. Sydney, QR Consulting. Damodaran, A. (2008). Strategic risk taking: a framework for risk management. Upper Saddle River, NJ., Wharton School Publishing. Iverson, D. (2013). Strategic risk management a practical guide to portfolio risk management. Singapore, Wiley. Longenecker, J. G. (2012). Small business management: launching and growing entrepreneurial ventures. Mason, OH, South-Western Cengage Learning. Marcinko, D. E. (2005). Insurance and risk management strategies for physicians and advisors: a strategic approach. Sudbury, Mass, Jones and Bartlett Publishers. Read More