Happy New Year!
Issue # 84
January, 5, 2009
Since risKey is about insurance and risk management, I thought it appropriate to start off the year by examining the differences between the two. These terms, while often used interchangeably, have two very distinct and different meanings.
Insurance
Insurance is one of many tools available to the risk manager. It is a product that utilizes a contract to transfer potential losses to another party, usually an insurance company. As such, these contracts contain certain limitations that do not cover all costs of a given loss. The industry promotes these products with competitive pricing, therefore it is no wonder they come to be viewed as a commodity. The buyer often chooses based upon price, and then feels the task of managing risk is done for the year.
In actuality, the purchase of insurance involves complex, highly differentiated solution alternatives, and making the decision on price assumes there is no difference between financial strength, stability, coverage, or service.
Insurance, as a risk management tool, is the choice of last resort and not a substitute for good risk management practices. In reality, it is up to the organization's executive team to proactively manage risk. After all, it is far better to prevent the loss than relying on insurance to pay a portion of it.
Risk Management
Looking at the big picture, risk management considers a variety of ways to protect the entities assets and improve its prospects for continued success. An effective risk management program starts with identifying the various risks an organization is faced with. Then a combination of loss prevention and loss control initiatives are undertaken to manage the potential losses created by these risks.
Examples of loss prevention would be establishing roles and responsibilities for safety, implementing training programs, creating a system for accountability, and producing clearly defined safety policies. Loss control could include things like developing a disaster recovery plan, or establishing an early return to work program for injured workers.
In the long run, the only answer to reducing the total cost of risk, whether insured or otherwise handled, is to reduce or control losses. The investment of time to implement an effective risk management program provides a solid rate of return for an organization, impacting both the insurance and loss cost.
Kempkey Insurance Services goes beyond insurance by designing and implementing risk management programs for growth oriented businesses. We help our clients maximize the value of their insurance dollars and minimize their potential for unwanted surprises. Ed Kempkey can be contacted at (888) 536-7539 extension 2188, or at ed@kempkey.com.