Identify and manage Risks to prevent catastrophic losses to your business

Risk Management is crucial for businesses today

As president and owner of Heuer Insurance Company in Sparks, Larry Heuer is well aware of the catastrophic losses businesses have the potential to experience if they don’t practice appropriate risk management. As an example of sound risk management, however, he chooses to remember a client who suffered a large loss due to a fire caused by a tenant in one of his upscale apartment complexes. “This was a very bad claim, but the client had the right amount of coverage,” Heuer explains. Having the right amount of coverage meant that the client avoided having to reach into his own pocket to pay for tens of thousands of dollars for the extensive damage to his property. “The purpose of insurance is putting you in the same position after the loss as before,” Heuer says.

Although having the right insurance is crucial to any business, it’s only one cog in the complex wheel of good risk management. “Risk management is a much more comprehensive look at risk [than just insurance] with a formalized process,” explains Gregory Pike, chief sales officer for Nevada for Hub International Insurance in Las Vegas. Risk is broadly defined as the probability of an unforeseen incident and its resulting penalty. Risk management is the identification, assessment and economic control of those risks that can endanger the assets and earning capacity of a business, according to Cholamandalam MS Risk Services Limited. “Ultimately it’s about the economics,” says Lou Bubala, partner and bankruptcy attorney for Armstrong Teasdale in Reno.

In identifying the risks for a specific business, it’s critical to encompass every facet of the business, from the most obvious risks common to many enterprises to any unique risks a particular business might have. This identification process can include legal, physical, financial, human, intellectual and technology risk issues. It’s also useful to think about business risks as being non-entrepreneurial, such as fires and floods, and entrepreneurial, such as economic forecasting and product development.

Risk Probability

Once a complete list of risks has been established, some risk managers advise that each risk be assessed for its probability of occurrence using a scale such as the following:

Very likely to occur some chance of occurrence small chance of occurrence Very little chance of occurrence

In addition to employing the occurrence probability scale, it’s important to evaluate the potential financial damage that could result from each risk in order to respond appropriately. If a risk is very likely to occur, but doesn’t present a huge loss, it could be less threatening than a risk that has very little chance of occurring, but could devastate the company. Actuarial tables providing a statistical analysis of these variables can be very helpful and are available in various types of software and also on the Internet.

Depending upon the nature of the identified risks, they can either be managed or controlled economically by transferring the risk to various forms of insurance or mitigated through a variety of business practices and policies in-house. In deciding how to manage the risk of a potentially dangerous animal act on stage, for example, the business owner can transfer some of the risk to an insurance carrier, modify the conditions under which the act takes place and have money set aside to satisfy any liability actions or even decide that because the risk is too great and would cost too much to mitigate it’s not a good idea to even have the act.

Risk management decisions should be based upon preventing as much risk as possible (although complete eradication is not realistic for everything) and/or mitigating risks to a level that is at least somewhat tolerable for the business. “There will always be risks or events that cannot be fully prevented or contained, so it’s important for businesses to develop effective response and recovery plans,” says Todd Macumber, president of the Risk Services Division of HUB International Limited.

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