How to Identify and Evaluate Your Exposures to Loss
Loss exposures have several elements to consider. The first element is the type of exposure that we are dealing with. Normally a loss exposure type can be personnel, liability, property, or loss of income. The list of perils can be quite lengthy within each exposure.
Some usual perils include such things as fire, theft, explosion, bodily injury and property damage, termination, death, illness, disability, embezzlement, fraud, employment practices, professional liability, to name a few. Finally the consequences of a loss need to be considered whether they are financial, loss of reputation, or marketplace setbacks in market share. There are seven basic risk management techniques in dealing with exposures to loss.
1. The first technique is that of avoiding or eliminating the exposure to loss in its entirety. If you have a troublesome exposure, such as a location that is uninsurable, you can eliminate that exposure by selling or getting rid of the property. Another technique is to avoid the exposure by never entering into problematic loss exposures in the first place. While this is a 100% solution to eliminate your loss exposure it might not always be practicable or feasible based upon your business situation.
2. Loss prevention is another strategy to help reduce losses. The prevention can be such things as preventing a total loss to a building by having the building completely outfitted with sprinklers.
3. You can reduce your exposures to loss by focusing in on the perils or risk circumstances that tend to generate claims. Drivers under the age of 25 have a much larger propensity to have an accident. You can reduce your exposure by only hiring drivers who are over 25 years age of age.
4. Segregating your exposures to loss. This would entail not keeping all your eggs in one basket. Thus, you would spread out your property over multiple locations in multiple buildings and possibly in multiple cities and/or states.
5. Non-insurance transfers. This is whereby you transfer the risk to someone else and they provide the insurance and/or name you as an additional insured under their policy. This is usually termed an additional insured endorsement, a waiver of subrogation, etc.
6. Transfers via insurance. This is the most typical transfer of risk and loss is through having an insurance policy in place. This technique only works if you have the proper business insurance policy with the proper coverages and the proper limits in place. All three of these items must be in place. You must have the appropriate policy, with the appropriate coverages, and limits high enough to take care of any exposures to loss that you may have.
7. Finally the last technique in dealing with exposures the loss is to retain the risk either partially or in full.
The seven risk management techniques, depending on the size of your company can all be used interchangeably within your risk management portfolio. The selection and implementation process is dependent upon your risk tolerance, and your financial ability to fund the losses within each specific strategy.