A Common Insurance Risk Management Question: What Is Risk Management?

What is “Risk Management”?

Let’s take a more specific look at what exactly risk management is about. Searching the literature I find a number of definitions. Here are a few I think focus your thinking:

1. Risk Management is the practice of protecting an organization from financial harm by identifying, analyzing, and controlling risk at the lowest possible cost.

1. Risk management is the active identification, evaluation and management of all potential hazards and exposures to loss that a company may experience.
2. Risk management should be a continuous process of identifying loss exposures, measuring them against the firm’s ability to tolerate them, then handling them with the appropriate control, transfer or financing techniques.

The most fitting is the first definition because it is very blunt with regard to “protecting an organization….at the lowest possible cost.” Everything else is a discussion point. You should always try to keep this in mind when discussing the purchase of an insurance product or discussing other risk management techniques because, after all, that is what we are all after – the lowest cost.

The challenge is to think about ways in which to reduce costs, properly communicate the pros and cons of each choice and arrive at the proper solution that will best protect the organization.

However, the key to definition #2 is that it has the word “active” in it. It’s absolutely essential that you keep informed about things going on around us – locally, nationally and internationally – that bristle with the potential to affect your business/organization in an adverse way. Once you recognize a certain “exposure”, you must act on it one way or the other. And, obviously, one of the “act on it” steps may be classic insurance.

REDUCE THE RISK / BOOST YOUR BOTTOM LINE

Protecting your organization from financial harm is the #1 Goal. Doing that, at the least possible cost, is admirable (but not practical) – you must be actively involved in recognizing potential exposures and hazards on a continuing basis throughout the year. Jump in with both feet and ask, “How can we improve our risk management program today and tomorrow and beyond?” That’s a continuous process.

Definition #3 identifies risk management as a “continuous process.“ It’s not appropriate to establish or simply renew your insurance program and then put it up on the shelf until next year. Risk management is a continuous process that begins even before a policy is written and does not really end at all.

It is a work in process/progress where you continually look to improve coverage, terms, conditions, claims reporting/handling, loss control/mitigation, exposure analysis/identification and the like, year after year.