Mar 18, 2009
by LOWELL H. LAMBERTON of Central Oregon Community College
Are you a risk-taker? If you are an entrepreneur, the answer should be a resounding
"yes!" And a downturn in the economy should redirect that spirit, not dampen it. Taking risks is part of the very definition of the word "entrepreneur." It wouldn't take long to make a list of the dozens of areas that anyone who is paying attention would have to call “risk areas.” The current economy has exposed a few new ones, as I’m sure you know.
Because you are bound to encounter such risk areas, you should be alert to the issue of risk reduction. Notice that we didn't say "prevention"; you'll never be able to prevent all risks, even in good times.
Risks are involved with every detail in a business, including:
• Unexpected areas of competition, including new competitors
• Changes in the economy that affect profits and opportunities
• Changes in your customers, including their taste, needs, and desires
And there are others, including liability loss, loss of key people, and natural disasters. The critical risk area that is often overlooked, though, is that of indirect possible loss. We often buy insurance for the direct risk, but forget the indirect, sneaky things that are by-products of any major loss. The major loss might be well insured, but what about the ripples from the central problem?
For example, perhaps you are insured for a physical disaster such as an earthquake or flood. Have you taken into account the indirect losses that might come from such an occurrence? They could include extended down time, loss of customers—perhaps permanently—and loss of employees, just to mention a few.
The better insurers have anticipated the worst, including indirect risk. Many insurance agents provide a risk analysis questionnaire that includes a checklist involving both direct and indirect exposure issues. You can get information on such data from the Small Business Administration. They can be accessed at www.sba.gov/library/pubs.
Whatever excellent help you might get from a qualified agent, however, you as entrepreneur need to be your own risk manager. You need to customize your risk analysis for the unique needs of your type of business, and of you and your partners or stockholders. Here are a few suggestions for a first-rate risk management plan.
1. Decide exactly what your risk management issues are, and write them down. Then clearly mark which issues you expect insurance to cover for you, which you can handle yourself, and which are too unlikely to be concerned with.
2. Check out the relationship between cost of premiums and loss probability. An insurance company has to obtain enough premiums to more than cover the possibility of your suffering a loss. Of course, their premium has to be proportional to the possibility that the loss will actually take place. These probability issues are calculated by actuarial departments in the insurance firm. Be your own actuary and double-check your probabilities.
3. Choose a reliable insurance agent or two on whom you can relay. Don’t complicate things and increase expenses by hiring more that one or two agents.
4. Be totally straight with your insurance agent. He or she can’t be effective at helping you unless you put all of your cards on the table. Withholding crucial information from your agent can hurt you terribly if and when a loss occurs.
5. Set up methods of dealing with every risk area in some way, especially by risk reduction. In other words, lower the possibilities that something negative could happen insofar as possible; don’t rely on insurance to cover everything.
6. Have an independent appraiser evaluate your business on a regular basis so you can always be aware of what your possible losses would amount to in terms of real assets.
7. Finally, don’t underinsure as a method of saving money. There are other, wiser methods of reducing expenses.
If you haven’t given enough thought to risk management, it’s not too late. Seek out a qualified insurer and get those nagging questions answered. You will benefit, as will your customers and employees.