Every organization has risks. Owning property; conducting operations; owning and using automobiles; hiring employees; signing contracts; selling goods and services – all of these present risks to the organization. Risks are an unavoidable part of any organization’s existence. Therefore, every organization, whether it realizes it or not, practices risk management. Those who do it well reduce their costs, particularly for insurance premiums.
The first step in risk management is to identify the organization’s exposures to loss. These include property (could be destroyed or stolen); its products (could injure someone); its vehicles (could injure someone or be damaged); employees (could be injured or sue over unfair treatment); its interactions with the public (could damage someone’s property); and its services (someone could sue over bad advice). Most organizations have a long list of possible loss exposures.
The next step is deciding what to do about them. There are several risk management techniques available to treat each loss exposure. These include:
Risk avoidance: Deciding not to take on that exposure. The organization decides not to buy a building.
Loss prevention: Taking on the exposure and trying to keep losses from happening. It buys the building and prohibits smoking within 25 feet of it.
Loss reduction: Taking steps to make losses that do happen less severe. The building owner makes sure fire extinguishers are available on each floor.
Contractual transfer of risk: Signing a contract with someone else who agrees to take on the risk. The building owner rents the building with a lease that requires the tenant to obtain insurance on it.
Risk retention: Bearing the cost of some losses without outside help. A jewelry store decides to absorb up to $5,000 in theft losses.
Insurance: Buying insurance to cover the cost of losses the organization does not want to retain. The jewelry store insures its stock for theft losses above $5,000.
Once the organization has selected one or more risk management techniques, it must put them into action. This can take the form of protective gear for employees; regular maintenance for vehicles; first aid kits; good housekeeping to prevent slips and falls; advance planning for weather emergencies; reserve funds for retained losses; and purchase of insurance, among other things. The last step is to monitor the risk management program’s effectiveness and make adjustments, as needed.
Organizations that practice good risk management can realize several benefits. One of the foremost is reduced insurance premiums. An organization that actively controls its risks is very attractive to insurers. It will find itself the object of competition from several companies, each of whom will try to offer the lowest premiums. Also, the more losses the organization retains, the less the insurer has to pay. The insurer will lower the premium to reflect its own reduced risk.
Risk management has other benefits. Some losses, such as disruption of work schedules and time spent on post-accident paperwork, are not insurable. Also, safe workplaces attract good workers. Contractors with poor safety records may have trouble winning bids on projects. For the good of its operations, reputation and bottom line, every organization should make risk management a priority.
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