Types of Risk Management Strategies
Risk Transfer
The first option is risk transfer, a strategy whereby a company shifts the potential financial loss from a particular risk to a third party, usually an insurance company. This can be done through various insurance forms, such as property, liability, or cyber insurance. The company pays a premium to the insurance company in exchange for protection against certain risks (Dvorsky et al., 2021).
For example, suppose a company purchases property insurance. In that case, the insurance company will cover the cost of damages to the company’s property in case of a fire or other covered loss. This can be a cost-effective way to manage risk, as the company is only responsible for paying the premium, not the full loss cost. However, it is important to note that not all risks can be transferred, and some risks may not be insurable.
Risk Mitigation
The next choice is risk mitigation, which is a plan that entails taking the initiative to lessen the possibility or impact of a prospective loss. This can include implementing security protocols, such as firewalls and encryption, to protect against cyber threats or implementing safety protocols to reduce the risk of accidents or injuries (Dvorsky et al., 2021). This can also entail performing routine risk assessments, developing and testing emergency response plans, and instructing staff members on risk management best practices. A corporation can better safeguard itself from economic damage by taking measures to lessen the possibility or impact of a loss.
Risk Avoidance
The third choice can be risk avoidance, which involves not engaging in certain activities or business operations that may expose the company to a significant risk. This can include discontinuing a product or service, divesting from a particular market, or not pursuing a particular opportunity (Dvorsky et al., 2021). By avoiding certain risks, a company can reduce its overall level of exposure and protect itself from potential losses.
The Importance of Business Insurance
Property Insurance
Natural catastrophes like floods, storms, and earthquakes can harm a company’s assets and machinery. A company without property insurance would be responsible for paying for all damages to its property and equipment, which can be substantial (Dvorsky et al., 2021). The cost of rebuilding or replacing damaged property can be high and could result in a significant loss for the company, potentially leading to bankruptcy. Property insurance is important for companies as it can help them recover from damages caused by natural disasters.
Cyber Insurance
In recent years, the frequency of cyberattacks has increased, which can seriously harm a company’s data and systems. A company without cyber insurance would pay for all costs associated with the attack, such as restoring the company’s systems and any lost data. The cost of a cyber-attack can be substantial and could result in a significant loss for the company (Dvorsky et al., 2021). Cyber insurance is important because it can help companies recover from the financial losses caused by a cyber-attack.
Key-Man Insurance
Losing a key employee, such as a senior executive or a key salesperson, can significantly impact a company’s operations and bottom line. A company without key-man insurance would be responsible for paying for any loss of revenue or increase in expenses that result from the loss of that employee (Dvorsky et al., 2021). This can be substantial, especially if the employee is a key part of the company’s operations. If a firm loses a key employee, key-man insurance can offer financial security, enabling the business to carry on and lessen the economic effect.
Reference
Dvorsky, J., Belas, J., Gavurova, B., & Brabenec, T. (2021). Business risk management in the context of small and medium-sized enterprises. Economic Research-Ekonomska Istraživanja, 34(1), 1690-1708. Web.