Risk is a part of our every day lives, both as an individual and certainly as a business owner. In his book, The CFO Guidebook, Steven M. Bragg suggests that there are three risk planning options: mitigate the risk, accept the risk or transfer the risk. Each of these options will be briefly described, with greater emphasis on the third – transfer of risk.
Risk Mitigation: Mitigation simply means taking steps to reduce the impact or severity of a condition or event. For instance, one way to mitigate hazard risks such as flood is to locate businesses outside the flood plane.
Risk Acceptance: In some instances, the impact of the risk is small that it is prudent to simply accept the risk. In other instances, the probability of significant rewards far out weighs the associated risks.
Risk Transfer: The transfer of risk to a third party is accomplished by purchasing insurance. Insurance is not appropriate for all types of risk, however. Only events which have high loss potential and are expected to be infrequent in occurrence are candidates for insurance protection. That said, there are many types of insurance products available. Some of the more common are as follows:
- Disability Insurance – This insurance protects the company in the event that a critical employee may be injured and can not perform their duties at the company.
- Key man Life Insurance – This insurance protects the company should a key employee die or be killed.
- Property Insurance – This insurance protects against the loss of physical property.
- General Liability Insurance – This insurance protects the company in the event that a guest or visitor is injured on the premises or that a customer is injured by a product made or distributed by the company.
- Umbrella Insurance – This insurance provides additional coverage beyond that set by the other insurance policies.
- Automobile Insurance – This is insurance protection for damage to vehicles or for injuries to third parties caused by company vehicles.
- Workers compensation Insurance – This is insurance coverage required by state law the compensate employes for on the job injuries.
- Errors and Omissions Insurance – This insurance provides coverage to third parties for errors or accidental mistakes
Other types of insurance are available, but these are the most common.
Risk Planning is important. Three types of risk planning strategies were discussed in this article – risk mitigation, risk acceptance and risk transfer. While a variety of strategies are employed in risk planning, insurance is a very common method for minimizing the impact of unplanned events.