The Business Case for Risk

Having been in the insurance industry for more than 20 years, I have viewed risk from various perspectives: loss control, claims, underwriting, brokering and risk management. However, the transition six years ago from working in the insurance industry to launching a software company provided more lessons about risk than two decades in insurance ever could.

It may be that adopting a wider view of risk — essential when running a business — can avoid the development of tunnel vision. When a career is spent thinking of risk in a negative way, it has to colour your view. We call a piece of business a risk, a chance of something going wrong a risk, and we talk about cost of risk.

Risk is a chance that something will go wrong. Should this occur, it may mean a higher loss ratio and higher premiums, possibly lost business. Invariably thinking of risk as “bad” ignores the upside and the possible benefits.

Entrepreneurial bent

That may be at odds with the view of an entrepreneur, for whom insurable risks are unlikely to be the types of risks uppermost in his or her mind. Those who start and run businesses, in fact, commonly see risk as an opportunity: taking a calculated risk carries with it a possible payoff. Understand that perspective and learn to speak the same risk language as clients and prospects, and the result can move beyond helping protect customers from some of their risks to helping them use risk to their advantage. Achieving that can prove a huge advantage in the marketplace.

Against enormous odds, people who launch and run businesses take on substantial risk through investing their money, personally securing debt and selling assets, among other things. In a bid to transform concept to reality, the focus is sharply on all business risks — for example, cash flow, employee recruitment and retention, intellectual property, data security, reputation, market risk and competition — before risk related to insurance.

Most brokers talk about only insurance, which is only one of many ways to control risk. Rather than risk control, optimization of risk should be the goal.

Risk optimization does not mean simply purchasing insurance; risk optimization means assessing an opportunity, evaluating the associated risks and benefits, and pursuing a course of action that strikes the best balance between upside and downside.

In recent years, many brokers have started calling themselves risk management advisors. Whether or not they are doing things much differently than in the past is up for debate. However, central to rebranding themselves as trusted is the need to change the conversation.

Being a trusted advisor is not about being all-knowing and able to provide each and every solution; it is about being able to understand a client’s risk and talk about it differently so that it speaks to their specific needs and circumstances.

Different language

How to talk differently about risk:

1. The nature of business is to take risk, something about which customers are well-aware. Build relationships by talking to customers about what is going on in their industry and/or their companies.

2. All businesses manage risk, although they may not define it as risk management and formal processes may not be in place. Occupational health and safety is a form of risk management; same goes for quality control and all other practices and procedures that have evolved over time to reduce employee downtime, increase customer satisfaction, reduce litigation, etc. Look more closely and ask the right questions to unlock the wealth of information that customers likely already have about risk management.

3. Understand the different kinds of risk; for insurance, these mostly deal with hazard risk and operational risk. To get business people to pay some attention to insurance risk — rather than just day-to-day financial and strategic risks — it is necessary to be able to differentiate and provide examples. As a guide, hazard risks include such things as fire, weather and products liability; operational risks cover things such as loss of key employees, occupational health and safety and supply chain disruption; financial risks encompass such things as liquidity/cash, interest rate fluctuations and fuel prices; and strategic risks include company/brand reputation, new competition and mergers and acquisitions.

4. Get to know your customers’ opportunities and concerns. Help them to see the opportunities in risk and what services and assistance you can provide. Risk management fosters opportunity. By clearly demonstrating to clients ways in which to mitigate risk, they may be able to capitalize on that risk and create opportunities.

5. Think beyond insurance. Rather than providing only insurance terms, offer the client a prioritized risk management plan, itemizing all identified risks, and clearly differentiating between what is already being adequately addressed and the areas for improvement. Go the extra mile to show the client the return on investment of treating those risks.

 Competitive advantage

Helping clients understand risk and the value of risk management will aid them to reduce losses, become safer, increase efficiency, chase opportunities and make them more profitable. Better clients make for long-term clients with lower loss ratios.

By learning clients’ perception of risk, speaking their language and becoming a trusted risk advisor, the competitive advantage gained will help attract and retain business.