How do you think about the cost of insurance?

Is it an expense?

Or an investment?

As a CEO, CFO, COO, VP, Controller, Manager or Board Member of a company, if a part of your responsibility is to oversee or provide input on your company’s insurance program, then -

You ARE a risk manager. Whether or not you are fluent in “insurance” is another issue. Regardless, you still have to ask yourself, “Do I view risk management as an investment or an expense?”

The answer will drive the success of your program.

The recent “Protecting Value Study“ from the commercial and industrial property insurer FM Global, the Financial Executives Research Foundation, and the National Association of Corporate Treasurers (NACT) polled nearly 400 CFOs, treasurers, and risk managers at both U.S. and international companies from a broad variety of industries. They asked the “How do you view risk management?” question.

The study found that 85 percent of the respondents indicated that they view risk management as an investment. In particular, they do so because they believe that it protects their business continuity. As a result, they believe there is a realized return on investment.

One of the surveyed CFOs summed up risk management in this way, “Risk Management is an investment because it is instrumental in protecting the future value of the company and mitigating exogenous events that could impact the ability of the company to generate a positive return to its shareholders/owners.”

Executive level insurance decisions are not just about hedging bets. It’s as fundamental to the well being of the entire business enterprise as the investment in, say, labor or materials. And, as with all investing, the measure of “the best” insurance isn’t necessarily that it’s the cheapest.

Still, the insurance decision-making process often has “how much does it cost” as its pivotal consideration.

An employee is injured … A fire occurs … An invitee trips and falls …

Unfortunately many companies are not focused on loss control measures until -

It’s too late. It’s probably accurate to say, beyond the “human” considerations, insurance often foots a big piece of the bill. But often at a cost that, in the longer term, doesn’t serve the financials as well as an upfront investment in loss control would have.

Risk management is all about reducing and mitigating the exposure to risk which in turn reduces costs.

Basically there are three loss control approaches -

Avoidance, Prevention and Reduction.

Each of these can be employed in a pro-active or a re-active fashion. In addition there are a few other loss control tools that can be utilized to reduce risk – separation, duplication or redundancy, contractual transfer and salvage.

Becoming more proactive in your C-Level approach to loss control will serve to help reduce the overall cost of your organization’s insurance and risk management program. By taking a proactive approach to loss control you also place your company in a strong position when it is time to renew your coverage.

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.