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Business Insurance as a Part of Risk Mitigation

Business Insurance as a Part of Risk Mitigation

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Business risk too often is defined very narrowly and only in the context of the business plan and establishing credit. Business risk is much broader extending to probable material effects of events on a businesses’ ability to achieve established strategic goals.
Business risk too often is defined very narrowly and only in the context of the business plan and establishing credit. Business risk is much broader extending to probable material effects of events on a businesses’ ability to achieve established strategic goals.

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Published by: Dr. Earl R. Smith II on Jan 09, 2009
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06/16/2009

 
Business Insurance as a Part of Risk Mitigation
By Dr. Earl R. Smith IIDrSmith@Dr-Smith.comwww.Dr-Smith.comBusiness risk too often is defined very narrowly andonly in the context of the business plan andestablishing credit. Business risk is much broaderextending to probable material effects of events on abusinesses’ ability to achieve established strategicgoals. Professional governance will be concerned withbusiness risk in the broadest sense and establishstrategic plans to identify and mitigate risk.Business risk will vary by industry group. Eachoperating unit of a company will have unique challenges and riskassociated with the individual business unit. The board of directorsshould be concerned with the overall risk to the business and theimpact a particular event could have on the company as a whole.Some of the common risk businesses’ face includes:o Natural disastero Customer or employee accidentso Product liabilityo EmbezzlementSome risks associated with business are less obvious but can have adevastating effect on a company’s ability to continue to operate. Someof these less obvious risk events are:o Supplier bankruptcyo Loss of reputationo Waro Unexpected new product introduced to market The board of directors will often engage an advisor to assist the boardwith establishing criteria for a systemic risk management program.Most risk programs will start with an assessment of potential riskevents. Risk events are events in which the company may not be ableto avoid, but which if occurred could have a major impact on thecompany as a whole. Typically, risk events are assigned a number from1 to 5 with 1 being unlikely to occur and 5 being almost certain tooccur at some point in the future. Advisors can assist the board byadding their broad experience to the assessment of risk.
 
Risk assessment also must consider the potential impact a particularrisk event will have on the business should it occur. Not all risk will betreated the same. If the impact of a particular risk event is not largeenough to have a systemic impact on the company’s ability to deliverits goods and services is may not need to be part of the company’s riskmanagement program even if the risk event is likely to occur.Indentifying risk events is the first step in developing a riskmanagement program and assessing the impact is the second. Thethird step is to develop a mitigation plan. Risk mitigation involves astrategic plan to reduce a company’s exposure to a particular riskevent. Specifically, a mitigation plan should reduce the impact theevent will have on the company should it occur. A major component of risk mitigation is by covering as much of the company’s exposure aspossible with appropriate insurance cover. There are several types of insurance a board of directors shouldconsider as part of a thorough mitigation plan, including:o Errors and Omissions insuranceo Officers and Directors insuranceo General Liability insuranceo “Key Man” insuranceEach type of insurance covers a particular risk. Directors shouldcarefully read and understand the policies and pay particular attentionto all definitions, exclusions and coverage limits. Directors shouldcertainly engage a lawyer or an independent insurance specialist toexplain in detail any part of the policy. Insurance companies will oftenprovide standard insurance policies that can be tailored with additionalcoverage or fewer exclusions for additional costs to the consumer.Companies should not assume particular events are covered. Abusiness general liability insurance policy will not cover an automobileaccident involving a delivery truck.Whether the organization is not-for-profit, or for profit the function of the company’s leadership is to manage all aspects of the companyincluding risk. Any risk management plan will attempt to lowerexposure while mitigation will attempt to lower the impact a risk eventwill have on the company as a whole.~~~~~~~~~~Related Articles:

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