What is risk management and where does insurance fit into the process?

To maximize productivity and strengthen business performance, it is critical to protect the assets of your business, both people and property, from a wide range of exposures. “Risk management” is a systematic process for identifying business risks; outlining and analyzing options for eliminating, controlling, transferring or funding these risks; and putting the best programs and protection in place. Insurance, a form of risk transfer, is frequently used to address and manage many of the most common exposures to loss.

Why is risk management important?

A deliberate and disciplined risk management and insurance purchasing process protects an organization and its people from financial loss and, when using insurance, transfers some of the major risks faced to a third party. This provides protection and peace of mind, because payment or indemnification will be received in the event of covered losses. A business is able to “trade” uncertain exposures such as the risk of loss, for greater predictability and financial protection. Good risk management practices, along with strong employee and executive benefit programs, also attract and retain capable people. In addition, risk management helps a business owner plan for and finance business perpetuation needs and strategies. In some instances, such as workers’ compensation insurance, coverage is required to comply with state and / or federal laws.

Where to start?

Hire the best qualified insurance brokers, employee benefits and risk management consultants available. Business owners and senior executives cannot afford to spend the time needed to thoroughly understand and stay current with the highly specialized discipline of risk management. Securing experienced, professional counsel is critical. Do not believe risk and insurance can be simplified or make the mistake of trying to develop a program independently. Understanding and managing risk is a complex, highly technical field. Every business needs the direction, advice, and advocacy of professionals. The following is a guide, developed from more than 30 years of experience, for building a strong, effective risk management and insurance program.

SELECTING THE RIGHT RISK MANAGEMENT / INSURANCE ADVISOR
Risk management and insurance can be complicated and confusing. Both are essential elements in the protection, growth and ultimate success of a business. Developing the right programs takes time, attention to detail and experience. Finding and hiring top professionals in this area is equally important as selecting the right legal, investment, banking and accounting advisors.

In general, insurance representation is provided by either agents or brokers and the distinction is significant. An agent legally represents the insurance company and a broker represents the consumer.

Insurance Agent

The representative of an insurance company is responsible for selling insurance products and providing services to policyholders. Agents have responsibilities in areas such as acceptance and binding of risks, notice, and other situations where they act on behalf of the insurance company.

Insurance Broker

An insurance broker is an individual or entity that represents the consumer in negotiating, servicing or obtaining insurance coverage. The broker negotiates insurance contracts on behalf of an insured for a fee or commission from an insurer. Unlike agents, who typically represent a single company, brokers have access to multiple insurance carriers.

Identifying the best brokers

Start by soliciting recommendations from trusted advisors and business partners. Law firms, bankers, accountants, and human resources consultants generally have a network of professionals who have worked successfully with their clients. Ask those who specialize in serving your industry; common denominators in these recommendations should emerge. Use the same process with others who own and manage similar businesses, as well as any strategic partners. The importance of reputation and obtaining results in a service business like insurance broking and employee benefits consulting should not be underestimated. The advice and suggestions of others can help identify the best and worst of potential partners.

Avoiding common pitfalls

Do not assume the professionals who handle personal insurance can adequately understand and manage business insurance needs. In fact, the odds are against it unless they are part of a larger organization that has successful property & casualty and employee / executive benefits practices. The agent who handles personal auto and homeowners insurance can probably put an entry level business program in place, but the business will likely outgrow this professional’s capabilities almost immediately. Complete the process properly by finding an expert who knows your industry and business and has the experience and resources to grow with it.

Do not ask multiple brokers / agents to provide an insurance “quote.”

Those who agree to provide a quote are often not the best the insurance industry has to offer, creating a disadvantage in securing the best coverage. Insurance companies prefer to see one broker control the marketing process, particularly if it is a broker that is well-regarded and respected in the marketplace. Insurance companies are most aggressive and creative in their offerings and pricing under these circumstances. Insurance companies recognize a better chance of competing successfully for the business when a single broker represents the account and manages the marketing process. To secure the best representation, go through a broker selection process. Consider several brokers based upon their products and services, as well as experience with similar firms and your industry. A qualified staff with services standards and practices, a strong business philosophy and values, and references from other clients and professionals should also be carefully reviewed. Choose the broker who best provides for the wants and needs of the business. Appoint them as the “broker of record” and have them work with you on the design, marketing and ongoing management of company programs.

What to expect from an insurance broker

An insurance broker participates in the insurance transaction as a consultant, advocate and representative. The broker represents the consumer in the insurance marketplace, assembling and understanding the information and specifications used to market and ultimately place insurance programs. The broker negotiates policy terms, underwriting conditions and premium pricing and is responsible for delivering, explaining and analyzing insurance company quotations and proposals. Good brokers will design programs that meet the individual needs and buying style of a company as well as its appetite for risk. To be most effective, the process must be highly individualized.

Without the advice, advocacy and leverage of an experienced, professional insurance broker, a business will not have access to significant segments of the insurance marketplace. Programs entered into without this insight will lack important features and benefits and a company will pay more than is necessary for proper coverage.

Beyond the marketing and transactional aspects of insurance, the best brokers are excellent insurance and risk management consultants. They understand a clients’ businesses and are able to effectively advise on multiple areas of risk such as immediate and potential, as well as alternative strategies for managing these risks which extend beyond insurance.

Do not assume unnecessary risk that can be potentially crippling or even fatal to a business. Understand the issues, follow the process outlined here and find the right insurance and risk management professionals to protect your investment.