First, let’s define what risk means in insurance and also understand what risk management is all about. Risk is the probability that an event would occur which would lead to certain losses or financial consequences. Risk management on the other hand is a situation whereby a company or organization takes steps to identify, assess and control risks that may affect the assets and earnings of the company.
Business owners have a lot to think about. They have to hire capable staff, seek funding for businesses, strategize, plan and implement. These activities can be very overwhelming and as such, it is not surprising that a lot of businesses put risk management at the bottom of the list of important things to be taken care of. Well, until something terrible happens and then they start to wish they had paid more attention to risk management in their business.
When there is effective risk management in place, situations and conditions that may threaten the business in the future would be identified and steps would be taken to prevent such occurrences and again, further steps would be taken to reduce the effect if it happens in spite of all efforts to prevent it.
Risk management involves three basic activities;
- Identification of risks.
- Assessing the nature of such risks.
- Taking steps to control them.
6 Advantages of Risk Management
The importance of risk management in an organization cannot be over-emphasized. Some of the benefits include:
- Guarding against loss of valuable resources.
- Reducing all forms of liability in the event of unfortunate occurrences.
- Protecting people and the environment from harm.
- Reducing premiums by showing your insurance company that you are fully committed to preventing insured losses.
- Reducing operational downtimes when losses or damages occur.
- Prolonging the life of a business and ensuring continuity of existence.
8 Types of Business Risks
There are many type of risks in business but the most common forms of risks include-;
- Legal risks-: This is the risk of a company or its officers being sued for misconduct or negligence. A business may be accused of non-compliance with rules and regulations or standard practices which may lead to a law suit and if found guilty, it may lead to serious financial and non-financial consequences. This kind of risk is applicable to all kinds of businesses but is more prominent in businesses that deal directly with customers.
- Physical risks-: Just as the name implies, these are risks that pose physical threats to the existence and smooth operation of a business. For instance, fire disasters, explosions, flood, spillage etc. are typical examples of physical risks.
- Financial risks-: Right from the moment a person invests a dime into a business venture, the person undertakes a financial risk because there are probabilities that the business wouldn’t do well and this may lead to a loss of investment. Also, in the course of running the business, some things may occur that would cause the business to lose some money and if not properly guarded against and managed, this may lead to the end of the business.
- Intellectual property risks-: This risk arises as a result of a company not taking sufficient steps to protect its intellectual property and inventions and as a result, it gets stolen and leads to a loss for the business.
- Economic risks-: Remember the 2008/2009 Global Economic Meltdown and how it affected companies with many of them closing down? That’s a typical example of how economic factors can affect a business.
- Inherent risks-: Inherent risks have to do with the nature of a business.
- Credit risks-: This involves the debtors of a business and the probability that they wouldn’t pay their debts at the end of day leading to financial losses by the company.
- Market risks-: This has to do with changing market conditions, buying patterns and changes in demands and trends that may affect the sales and profitability of a business.
7 Benefits of Insurance in Business Risk management
- Prevention and minimization of financial losses-: Insurance helps you to reduce financial losses when unfortunate events occur. For instance, when there is a breakdown of equipment your company might not be able to function properly and this might lead to a loss of revenue but you can use a business interruption insurance policy to guide against this such that the insurance company covers for any losses incurred during the period.
- Promotes business continuity-: When some companies are hit with sudden unfortunate occurrences, it may lead to the end if not properly managed but insurance helps to minimize risks so that the business continues to operate and grow regardless.
- Risk sharing-: Insurance also helps to achieve risk or loss sharing in business. Such that when a company makes losses instead of profits, the insurance company can come to the rescue. Also, when businesses are hit with misfortunes, they may not be able to solely afford the costs of getting back up and running again but when the business is insured, the risks are shared between the company and in the insurance company such that both parties can collectively get the business up and running again.
- Protection of business image-: When a business goes down, it is not only the business that suffers; the customers, stakeholders, shareholders and the public are affected too. Therefore, insurance helps to manage bad occurrences so that customers and every other person attached to the business can be protected.
- Protects the business against debtors-: Sometimes, debtors also pose risks to the business and insurance can help to protect the business against defaulters.
- Effective use of resources-: Insurance also helps to promote and ensure that resources are put to the best use. For instance, health insurance helps to ensure that employees are of perfect health and happy so that they can put in their best.
- Provides assurance to stakeholders and investors-: Also, when a company is insured, it provides a kind of assurance to people who may consider doing business with them. Insuring your company attracts shareholders and customers to your business.