What is “financing risk?”
Small and medium sized businesses (SMBs) take on a lot of risk in search of great reward. While you might be happy to take that risk, that risk often bites you in the rear and someone has to cough up money to pay for it. If this sounds a lot like insurance, you’d be mostly correct. Insurance is one method of financing risk. You identify areas (e.g. property damaged by fire) that you can’t or don’t want to pay yourself, and you transfer the responsibility of payment (through financial considerations) to someone else (insurance company). While nobody likes paying for insurance, it comes in handy when risk gets expensive.
One of the great misconceptions of insurance is that it “covers” more than it really does. While insurance is certainly a risk financing option, there is another important risk financing method. You. When you consciously or unconsciously take on the financial burden of risk, you become the insurance company. Sometimes you know it and sometimes you don’t. The latter is where a lot of angst, wailing, and gnashing of teeth comes into play. Although insurance may not be the sexiest of topics, on this month where we focus on being ready and prepared as a business, let’s identify where you might be in the unenviable position of financing your own risk, and what to do about it. Here are my four problem-solution areas for your consideration:
Problem 1: Too many SMBs view insurance as a commodity; and it’s the fault of insurers due to marketing strategies based on jocularity. Additionally, too many insurance agents consider themselves retail sales people that place coverage and move on for another “kill;” leaving the ongoing support to a service department.
Solution 1: Find an insurance broker that is an expert in more than sales. A broker should be a resource of information about how you can best control and manage risk. They should earn the right to be considered a trusted advisor and a regular contributor to your organizational success. In other words, stop buying insurance solely on price and factor in the perspicacity of your insurance broker.
Problem 2: You have no idea what you’re being insured for. Here’s a quick exercise proving my point: Take 30 seconds and name as many exposures and perils that your insured for. Go! Most of you will stop after fire, theft, and liability. With an emphasis on premium, the important issues around what risk is being financed gets pushed away and quickly forgotten.
Solution 2: Do an internal analysis of risk identification with your team, including your broker and/or a consultant. You can’t control and finance risk if you don’t know your true exposures. I know this doesn’t sound like fun, but neither is finding out you’re holding the bag on a large claim because it wasn’t covered on your insurance.
Problem 3: Your biggest exposures aren’t automatically included as part of your policy. I posit that liability around cyber and employment practices are any employer’s biggest perils when it comes to severity of a claim, yet they are NOT a part of your regular policy. While they might show up as “extras,” they are rarely adequate. Look at it this way, if it’s free, how good can it be?
Cyber liability protects your finances when a cyber event takes place (virus, hacking, identity theft, extortion, etc.). It pays for your loss of property (including proprietary) plus the liability you take on if personal identifiable information on employees and clients is compromised. Are you prepared to pay for an annual credit monitoring service (about $200 per person) for hundreds or thousands of people due to a breach?
Employment Practices Liability pays for demands for payment (claims) made by employees that are suing you for wrongful termination, discrimination, harassment, retaliation, etc. Are you able to pay the attorney fees out of your cash flow for legal fees and damages?
Solution 3: Buy cyber liability insurance (only about 50% of you do to adequate limits) and hire an IT specialist to come in and beef up your security protection. Educate your employees on email viruses and social media usage. Buy employment practices liability insurance and create a strong employee development program with an emphasis on leadership and culture.
Problem 4: Nobody knows what to do in an emergency. A calamity happens and no one knows who’s in charge and what to do next.
Solution 4: Create a business continuity and disaster recovery plan, put it in writing, share it with everyone and then practice it. I rarely see a good plan that meets all of those criteria from SMBs. If you want to protect your cash flow, profitability, and reputation, take the time to know how to most rapidly and effectively get back to business after a crisis.
Create a pre-plan that includes information that emergency responders can use to protect property and lives. A pre-plan doesn’t have to take an inordinate amount of time on the front end, yet could save lives and valuable assets on the back end of a crisis.
Bottom line, being ready and prepared may not seem sexy at first glance, but it increases the likelihood you that your people, property, and reputation will be protected and in a position to improve in the face of crisis and chaos. You’ve already risked a lot; why not assure that the rewards you have attained and will attain remain safe?
Dan Weedin is a strategist, speaker, author and executive coach. He helps small business and middle market business leaders and entrepreneurs to grow more profitably and create a better life. He was inducted into the Million Dollar Consultant™ Hall of Fame in 2012. You can reach Dan at 360-697-1058; e-mail at [email protected] <mailto:[email protected]> or visit his web site at www.DanWeedin.com <http://www.DanWeedin.com> .
Dan is also a risk consultant partner for Fire Planning Associates, Incorporated. If your business needs assistance in creating, updating or auditing life safety and emergency preparedness plans (EOP) contact Blazemark at [email protected]. The creators of Blazemark pre-planning software, Fire Planning Associates, have extensive experience in preparing pre-incident plans. This experience also includes incorporating plans into tabletop exercises and full-scale drills where all stakeholders can learn and practice skills in preparation for natural disasters and man-made incidents.