Enterprise Risk Insurance
To best understand the term “enterprise risk insurance,” it’s good to break the statement down into the phrase “enterprise risk” and the word “insurance.”
The word insurance is pretty well-known. It is a contract between two companies where the insurance company agrees to pay for the specific losses experienced by an insured business and for that contract, the insured business pays a premium. The contract between the two parties will state what must happen in order for the insurance company to be bound to making a claim payment to the insured business, as well as the various conditions that must be adhered to by the insured business during the policy period and in the event of a claim.
There is one catch though.
The insurance company¬—to be a real insurance company—must have a multitude of policy holders so that it can diversify and share the risk of claim among a multitude of businesses. This law of large numbers also allows insurance companies to better predict, manage, and price their risk assumed under the insurance policies issued to their customers.
In this way insurance is relatively well known.
Enterprise risk on the other hand is less well known for many businesses who are not large corporations, financial institutions, or publicly held companies. Enterprise risk refers to the various uncertainties, whether good or bad, that could impact the ability for a business to achieve its goals. This stems from the idea of enterprise risk management, which is an evolved form of risk management that looks across an organization to see how various uncertainties can impact future opportunities.
A business makes decisions every day that carry their own risk. Hiring new people, signing new vendors, establishing new supply chains, marketing to new customers, and branching product lines under new regulatory environments all have their own inherent risk. Sometimes this risk has good outcomes, and the business achieves well. Sometimes this risk has bad outcomes, and the business stumbles. The various uncertainties that can positively or negatively impact a business are called enterprise risks. Enterprise risk management then looks at all of those factors in light of the business objectives and works to treat the risk so that the uncertainties can be embraced at best, made tolerable at worst, but never derail a business entirely.
For some enterprise risk, no insurance is available: commodity pricing, exchange rate, and marketplace uncertainties are examples of speculative risks for which insurance is not an option. Other risks, however, can cause major business interruptions creating a no-win situation for businesses. These pure risks can be backed up by insurance. This is where enterprise risk insurance steps in.
So, you have to ask yourself:
- What is your business objective?
- What are you doing to achieve your business objective?
- What strategies do you have in place to manage the pursuit of your business objective?
- What plan do you have when catastrophic, unforeseen interruptions disrupt your operations and impact your bottom line?
The decision to purchase enterprise risk insurance is entirely up to you. While it might not be a fit for every business, for those at greatest risk to the pure downsides of an enterprise-level disruption, it can be everything.
If you are that business, we are here to help. Click on the link here to sign up for a webinar to learn how enterprise risk insurance can work for you.
If you are still unsure about what enterprise risk management is in the first place, click on the link to learn more
How to easily incorporate enterprise risk management into your business:
Businesses can adopt an enterprise risk management mindset to help promote positive,
proactive growth throughout the whole organization and by doing so greatly benefit from the stability and peace of mind that it brings.
The first step in adopting this mindset is to remember that purchasing insurance is not the goal of enterprise risk management; rather, it is one of the outcomes of enterprise risk management. This makes sense though: if you have a house, you probably have a property insurance policy, but you still lock the doors at night. Meaning, you have the insurance to financially recover from unforeseen losses, but you still take the necessary steps to protect your home. This illustration can be expanded to your organization as well.
Each year, there’s a good chance that your team gets together to review the last year’s business outcomes against your growth objectives and consider next steps. Sometimes businesses use a strength, weaknesses, opportunities, and threats (SWOT) analysis to organize their thought process.
Strengths and weaknesses are internal considerations that reflect the state of the organization and their impact on business objectives. On the other hand, opportunities and threats are external considerations that reflect the state of the organization and their impact on business objectives. Expanding a SWOT analysis to consider potential uncertainties within each category of the analysis can be an easy next step for looking at risk across the organization.
For example, consider strengths. You might say that one of the strengths of your organization is the highly-trained workforce whom are well-networked into a powerful group of customer and consumer contacts. If that’s you, congratulations! That is an envious spot to be in. To take a risk management mindset is to then ask the question “what could go wrong?” and openly play with scenarios that could interrupt the strength from benefiting the overall strategic objectives of the business.
Perhaps company intelligence lies with one or two W2 employees and this information isn’t shared among the staff at the appropriate security levels. What then happens if that staff member leaves? One solution, for example, might be to make sure that employee-level knowledge is shared appropriately among employees with the same security clearance levels. Of course, other solutions are available as well.
Once your team plays through various scenarios and solutions, the next step would be then to do this for each of the SWOT categories. Once you have that list, start looking at the potential impact of one category on another category.
For example, if you decide in your SWOT analysis that an opportunity is an acquisition of a company so that you could build market share, what could be the impact of that acquisition on the key staff members that you listed as your strengths?
In this way, expanding strategic analysis to consider the impact of uncertainties on the business strategy across the whole organization might get you a large list of uncertainties to consider. Once you have that list, you are ready to take the next step.
Alright, having a large list of uncertainties probably makes it overwhelmingly clear that your organization cannot manage all of them at the same time. They must instead be prioritized. Prioritizing the list of interconnected risks based on your company’s appetite for taking the risk needed to achieve your objectives, as well as the minimal level of risk that you were willing to endure, will then allow you as a management team to explore appropriate risk-based solutions to managing your company. (for future: Click here to access information on how to discern risk appetite, tolerance-levels, and strategically apply them to your business measurements)
Unfortunately, sometimes the process of analyzing the risk reveals a zero-sum game effect, causing you to realize that there could be no gain from a risk: only a loss.
Could you lose net business income if you lost a key person to an event outside of your control? If the answer is yes, you may decide that you treat this risk by taking measures internally to control this event and, by purchasing insurance, mitigate a potential outcome that could financially cripple your business by transferring the risk to an insurance carrier.
You can see through this train of thought that insurance is not the purpose of risk management, but it could be a potential outcome.
If deciding to purchase insurance for enterprise risk is your preferred outcome, we are here to help. Contact us today to receive your risk assessment questionnaire, which acts as a free, self-administered consultation. This RAQ affords you the opportunity to consider the insurable risk often hidden in your business while taking the first step toward underwriting into our program. To learn more about the Madison Insurance Group’s solution, click here.