When you’re insuring your business, you want to acquire the appropriate amount of protection. You don’t want too little protection, because underinsuring can cause major problems if a loss occurs. But overinsuring means you’re wasting money each time you pay the premium. Developing proper risk management is the discipline allowing you to plan for an appropriate amount of coverage for your business. Here are the steps you need to follow to appropriately calculate and manage risks.
Step 1: Analyze Risks
There is risk involved in every aspect of your business life, from products and services to facilities to contracts to hiring and employment practices to marketing practices. Every decision that you make as a manager is subject to some level of risk.
Making a profit, like everything else, requires some degree of risk. To sustain a profit requires you to identify and manage that risk, requiring you to complete a risk management audit that considers each point of contact between the business and its employees or customers.
When you’re considering liability risks related to customers, think about things from the customer’s perspective. Think like a customer. What are the steps you would take when you deal with the business, and what risks are involved? Walk the premises, review all your paperwork, and examine any products or services you offer for sale.
You’ll want similarly detailed liability risks for employees. There are a few particularly important risks to keep in mind, including injury, equity, and the legality of your employee policies. Also look at the fairness of your hiring practices and promotion process.
Step 2: Assume Appropriate Risks
You’ll have to assume some level of risk to succeed. The trick is to assume the right risks. There are generally three qualifications that would make it appropriate to assume a risk:
- A loss event is highly unlikely;
- A loss event would only cause minimal damages;
- The insurance to cover a potential loss is too expensive for your business.
Category three in particular is one that is likely to shrink over time. As you become more successful, you’ll have more to lose, making it more important to protect yourself.
Step 3: Address the Cause of Risks
When you analyze your risks, you’ll notice that some of them are obvious. While you would never operate your business in conditions that you know aren’t safe, many otherwise prudent entrepreneurs don’t take advantage of the option to improve the safety and production of their business. You should actively look for those opportunities. You might go so far as to bring in a safety engineer, but above all you should listen to your employees. They’re the ones operating your business daily, and you should take their comments and complaints seriously. By taking appropriate safety measures, you can reduce the risk of an accident and improve productivity, which can yield positive results for your profits and your insurance costs.
Step 4: Transfer Certain Risks to Third Parties
Transferring the risks to a third party is an effective way to reduce your risks as a small business entrepreneur. Find someone with more resources who is better able to manage the risk. Outsourcing these tasks, particularly ones that aren’t essential to your business, can sometimes be a better option than getting your own employees to handle them. But if you’re going to transfer risks, have a well-defined written statement of the agreement. And you should know that you might still be liable if the third party isn’t able or willing to cover a claim, even if you’ve shifted primary responsibility for the risk.
Step 5: Self-Insure
Create a reserve of funds specifically intended to cover certain types of losses. This sometimes makes more sense than paying for insurance, although there are dangers. This plan is not ideal for handling large claims, instances when you haven’t fully funded the reserve fund, or for businesses so small that they don’t have a base to spread the risk over. But in other circumstances, self-insurance can be a good idea. Small, recurring claims with predictable costs can be easy to handle without an insurance carrier administering claims. And for multi-unit operations, there is a broader base to spread the risk.
Step 6: Purchase Business Insurance
After going through the first five steps, which each are designed to reduce the need for or cost of insurance, you might still find that there are other risks that you can’t mitigate on your own. You need to purchase some form of insurance coverage to handle the risks of liability, property damage, and loss of production from employees. Think about special risks associated with your business. Look at additional special coverage that you could add use to supplement a basic package policy.
One source of help in instituting proper risk management at your business is your insurance agent. Make sure that your insurance agent is earning his or her commission by giving you good advice about ways to appropriately manage your risk levels. Don’t feel compelled to stick with the first agent you find; if one isn’t sufficiently willing or able to help, find someone who will.