Start With Risk
Any discussion of insurance should start with risk. Why? Let’s look at the definition of insurance.
Insurance is the transfer of risk for a premium. Risk is the keyword here and it means the chance of loss. You take your big bag of risk, and you pay the insurance company to take it from you. Let’s take a closer look at risk.
There are 3 types of risk:
- Business Strategies
- Business Operations
Strategic risks represent a possible source of loss and are often determined by business plan performance, business objectives, and overall business strategy. Changes in senior management, failed mergers and acquisitions, poor cash flow, problems with suppliers, vendors, or other stakeholders are all examples of risks that could impair an organization’s ability to meet its strategic goals.
Operational risk refers to the risk of losses that may result from disruption to day-to-day business operations. Some common examples of operational risk include inadequate or failed internal processes, human error, inadequately trained staff, and fraud.
Hazard risk represents a possible source of loss from something that can cause harm or physical loss. A few examples of hazard risk include electricity, pressure, chemicals, and fire.
There are 5 ways to manage the 3 types of risk:
- Prevent – proactive
- Mitigate – lessens the loss
- Transfer – contracts
- Finance – insurance
- Assume – pay out of pocket
These risk management solutions get more expensive as you work your way down the list. The cheapest way to deal with any major risk is to prevent it.
Are you having the right conversation with your broker? Any discussion of insurance should start with risk and examine the ways in which prevention, mitigation, and transfer of risk can eliminate the need for insurance or reduce the cost of it.
For informational purposes only. Not intended as legal advice.