Does insurance really cover your risk?

Similar to my blog post on taxes actually coming more than once a year, many businesses only think about risk one time a year. That time is typically when it is time to renew the property and casualty, general liability and D&O policies. For many businesses, this becomes a routine and mechanical process, when in fact it should be a very vigorous and strategic aspect of running the business on a day to day basis.

Before you even get to purchasing insurance, the first step is to identify the risks to the business. If you do not understand what the risks are, both in terms of financial and operational exposure to the business, how can you define how to mitigate these risks? Once the risks are identified and quantified, now you can develop strategies to mitigate the risks. Wait…it is still not time to call the insurance broker!

Before you even think about insurance as a risk mitigation tool, first think of other ways to avoid or control the risks facing your business. The first and obvious way is to stop doing business in a way that creates risk, or to change your business practices to reduce risk. The second might be to develop programs internally that would reduce your risk profile. This might include a safety program or training programs that over time will reduce your risk profile and experience. You could also potentially transfer the risk to your vendors or customers. This can be done contractually. Once you’ve exhausted these alternatives, then purchasing insurance could be the final component of a total risk program.

So before insurance renewal time comes, take some time to fully assess the risks surrounding your business and identify ways that these risks can be minimized or eliminated. You might even find out that you are currently buying insurance that you don’t really need.