The Importance of Insurance in Risk Management

Any business, company or project is subject to unforeseen events and uncertainties. To deal with them, a risk management plan that is periodically monitored and communicated to the entire organization is necessary. Unfortunately, many companies do not pay due attention to risk management, leaving them vulnerable to various losses. This article discusses how risk management and its transfer to insurance can be efficient and help companies make assertive decisions.

But what is risk management?

It is the set of actions that manage and control an enterprise’s potential threats, that is, methods, knowledge and processes combined to reduce or nullify losses and increase the benefits of project objectives and strategy, helping in assertive decision-making. The process involves all areas of the company, including managers from strategic sectors, qualifying and quantifying the possible causes of a given risk to conduct its mitigation satisfactorily. It identifies, measures, classifies, treats and monitors risks in a planned, structured and integrated way.

Risk management contributes to decision-making to control and prevent exposure of individuals, populations, and processes to agents that are harmful to health and the environment or to financial exposures. These coordinated actions make it possible to assess exposure to potential damage to certain agents.

There are several risks to which an organization is exposed, such as operational risk, socio-environmental risk, tax, reputational, technological, financial, political, market, financiability, resource, etc., and to take care of these risks; traditionally, risk assessment involves: 1) Risk Identification; 2) Risk Analysis; 3) Sensitivity Analysis; 4) Risk Mitigation and Allocation; 5) Risk Monitoring.

To identify risks, organizations need to understand their operating scenario. Thus, they identify and classify their vulnerabilities, subsequently evaluate their impacts and severity, create a risk transfer and control plan and monitor exposures with response plans to incidents.

"The insurance program must be personalized to your business to protect your company against the common and unusual impacts a crisis can cause."

One of the main phases of risk management is risk mitigation. Risk mitigation is reducing possible threats or risks to a business or project. Mitigation consists of identifying risks and developing a plan to control or eliminate them so that the company has confidence, peace of mind and security when executing the project. It is a fundamental component of any business strategy, particularly when it faces externalities, such as a change in macroeconomic conditions.

Risk mitigation typically uses four types of strategies to address risks:

1. Risk Avoidance: is a mitigation strategy that seeks to avoid any action that has the potential to result in unwanted risk.

2. Reduce or Control Risk: Risk reduction/control means taking actions to reduce the probability of a risk occurring or limit its impact if it does occur, such as adjustments or updates to processes.

3. Accepting risk is recognizing and accepting a possible risk; acceptance consists of moving forward with the awareness that the risk may materialize. For example, a risk inherent to your business that is not possible to transfer or when the probability of the risk is low, the negative consequences are not significant, or when the cost of mitigating the risk is greater than the possible expenses and impacts if the event occurs.

4. Transferring Risk: is a technical response to planning responses to risks by transferring the impact of a threat to third parties. By doing this, you protect your business, as it eliminates the company's liability if the risk materializes. A common example of risk transfer is the purchase of insurance. The company pays an insurance company to assume the costs of a certain risk. If this happens, the insurance company will pay for the damage, so the company will not suffer financial losses. Other ways of transferring risks are outsourcing or contracting services.

At this point, we will focus mainly on the transfer of risks to insurance and indicate the possible and normally used insurance.

The insurance program must be personalized to your business to protect your company against the common and unusual impacts that a crisis can cause. There are insurance products from different segments aimed at companies of all sizes; I cite some examples such as:

General Civil Liability Insurance: guarantees coverage mainly for material, bodily, moral and aesthetic damages caused to third parties resulting from an accident for which responsibility is attributed to the insured.

Professional RC Insurance, E&O: protects the company from claims resulting from the services provided to its clients, including covering defense costs in legal actions.

D&O Insurance, Directors and Officers: guarantees protection for executives and administrators of companies at the time of their management if they are held responsible for failures in their management actions that cause damage to third parties.

Cyber Risk Insurance: guarantees protection for losses arising from malicious cyber attacks that result in data leaks and other damages linked to information security.

Environmental insurance guarantees protection against possible incidents in industrial and commercial operations, infrastructure, transport, works and service provision. It covers cleaning costs up to investigation and monitoring of the affected site, protecting damage to the environment and third parties.

Business Insurance: Business insurance is a product aimed at legal entities. Its objective is to protect the company against risks inherent to its business and processes, such as the risk of suffering fires, robberies, explosions, floods, or revenue loss.

Transport Insurance guarantees damage to cargo at the time of transport, covering cargo transported in the event of a shipwreck, stranding, collision, overturning, overturning, fire, explosion, loss of packages, disappearance of cargo due to robbery and resulting damage from crushing, denting, scratching, breaking and contact with other goods.

The insurance industry covers various risks against most aspects of modern life, from business-related losses, death and disability to natural disasters and personal property losses. Insurance allows individuals and businesses to transfer their risks to insurers, thereby reducing the cost of loss. The company needs to adopt a risk and insurance management program according to its needs. Having a risk and insurance manager on its staff ensures that the transfer to an insurance policy will be efficiently and completely directed to the needs of your business.

Companies need to look at risk strategically and primarily, companies unprepared for risks face obstacles, such as:

● Spending above budget;

● Project results below expectations;

● Limitation of resources generating psychological exhaustion and work overload ;

● Team turnover;

● Failure to meet deadlines;

● Impacts on the company’s brand or reputation;

● Reduction in innovation;

● Financial losses.

Risks are part of the business. Companies can face them by implementing efficient risk management with risk mitigation strategies. Having a structured risk management plan is the best prevention for possible occurrences, being a determining factor for more effective and assertive decision-making. It helps manage your image to combat adversity and transfer your risks to insurance policies. These procedures guarantee peace of mind for your business and control of your losses. Do not wait for a crisis to adopt standard procedures.

The possibility that insurance offers to protect and repair something in the event of damage resulting from an event is of paramount importance. The lesson is that taking out a coherent and comprehensive insurance policy must be carried out with a correct risk management program and by a broker specialized in insurance clauses, thus seeking to control losses and the financial health of your assets, ensuring peace of mind in the regulation of the claim and avoiding undesirable surprises.