Risk management procedures give structure to certain processes within an organization that can mitigate financial losses. A full range of these procedures should address how to locate, mitigate, and insure risks.A summarization of these procedures follows:
- Locate risks. Conduct a review of all company locations, contracts, and applicable government regulations to determine the extent of risks to which the company is subjected. This task can be made easier by using one of the insurable hazard checklists supplied by insurance companies. Other investigative options are to hire a consultant or to review the company's history of losses sustained. The review should include a detailed report on all buildings and equipment, the cost of a business shutdown resulting from specific hazards, the risk of loss to other parties by the company, and risks caused by specific events, such as flood and fire damage.
- Mitigate risks. Designate a risk mitigation strategy for each identified risk. The general approaches to mitigation include the complete avoidance of a risk, reduction of the underlying hazard, self insurance that essentially retains the hazard, or buying insurance to shift the risk to an insurance company. The option selected should be based on a cost-benefit analysis that matches the cost and probability of a risk against the cost of the mitigation technique. Some of the more common mitigation techniques include duplicating key systems to guard against the destruction of one of them, adopting work rules to prevent risks from occurring (such as the use of hard hats), and distributing assets across multiple locations to avoid a catastrophic incident at one location.
- Implement changes. The implementation of selected risk mitigation methods must then be dealt with. This can require a budget for new systems to be installed, such as fire suppression systems in a facility. Other changes are procedural, and so require cooperation from management to institute training and enforcement activities.
- Pick a broker. It is nearly always necessary to buy insurance for some risks, so the selection of an insurance broker is of some importance. A knowledgeable broker can ensure that the correct coverage is selected, and can recommend the best insurance providers, based on his or her knowledge of their reputation, financial strength, and service after a loss has been incurred. Once a high-grade broker is found, it is better to retain that person's services over the long term, rather than routinely switching brokers at regular intervals.
- Buy insurance. Review the risk situation with the insurance broker, and jointly decide upon the best insurance coverages to buy. Possible choices include:
- Boiler and machinery. Coverage is for damage to boilers and machinery, and pays for injuries caused by equipment.
- Business interruption. Pays for business expenses while the entity is not operational.
- Commercial property. The basic version covers losses from fires, explosions, wind, and so on. The expanded version covers a broader range of damage situations.
- Comprehensive auto liability. Covers injuries and property damage related to auto incidents.
- Comprehensive crime. Coverage is for theft, robbery, and employee dishonesty.
- Directors and officers liability. Coverage is for directors and officers for their activities while working for the company.
- General liability. Coverage is for accidents on company property, plus incidents caused by its products, contractors, and agents.
- Inland marine. Coverage is for property while it is in transit.
- Ocean marine and air cargo. Coverage is for the vehicle being used to transport goods, the goods, and liability claims against the owner and operator of the vehicle.
- Workers' compensation. Coverage is for the medical and disability claims of employees who are injured while on the job.
This series of procedural steps is needed to ensure that all risks are addressed. Management may not choose to mitigate a risk, or it can take considerable interest in risk mitigation by a number of means; however, these procedures will at least make it more likely that management will have knowledge of the vast majority of the risks to which a business is subjected.