Operational risks and insurance
It is important to know how to identify risks and accordingly propose actions and mechanisms to minimise the impact these risks may have on your business. Potential risks should be continuously monitored to assure business survival and sustainability.
A risk represents the potential for an event or circumstance to occur which negatively affects your business. Risks may arise in any aspect of your business and could result in negative consequences or damage to the business in many areas.
Risks related to compliance with legislation or other regulations could cause you legal problems. Financial risks could disrupt your cash flow. Risks in your business operations could inhibit the ability of your business to generate value. Environmental risks could severely disrupt your business. All risks could hinder your strategic goals and damage your business’s reputation.
Each type of business has its own common types of risk. For example, retailers may be more concerned about security risks (such as products being stolen), while logistics and transportation companies will pay special attention to operational risks (such as ensuring their deliveries are being executed on time).
Although challenging, identifying and managing risks is key to understanding and minimising their effects on your business. Look into possible risks that could affect your business and download a template to help you assess them.
Risk management plans should emphasise common risks that could occur in your business and provide strategies to deal with them. They should guide you in allocating time and resources to managing expected risks and coping with unexpected ones.
• Keep in mind that different markets may entail different risks. When expanding your business into new (and especially overseas) markets, take the time to update your risk management plan to have the best chance of successful expansion.
Define and prioritise the critical controls needed to reduce fraud and also increase compliance and the identification and reporting of risks. For example, establish a process of comparing order forms and dispatch notes before you distribute products to make sure the right items are going out to your customers. Confirm that these critical controls are in place, and implement them as needed. Hire a person to regularly perform these checks if your employees do not have time to implement the controls.
• To ensure that critical controls are operating effectively, establish an assurance framework to monitor them. From time to time, gather random samples and check the correspondence of documents yourself.
• Create backup plans to account for the absence of key employees responsible for monitoring critical controls. If the person in charge of a control is absent from work, determine who should take responsibility for the job.
Understand the key risks across your business operations and supply chains. Operational risks for your business are challenges you may encounter in your day-to-day operations, such as theft of or damage to your physical assets, perishable goods, cyber attacks, losses arising from poor strategic business decisions, data theft or fraud.
• To properly evaluate your operational risks, consider all the key stakeholders and aspects, such as customers, regulatory requirements and business assets.
There are many scenarios in which the day-to-day operation of your business may be negatively affected. However, you should pay special attention to data breaches and business downtime.
• A data breach represents a breakdown in your security and often results in disclosure of your sensitive, personal or otherwise valuable information. Although this includes incidences of cyber crime, many data breaches are a result of human error.
• Cyber attack, environmental disruption (such as storms) or other disasters (such as fires or floods) may stop your business from operating normally. Without significant financial reserves, even a short pause in trading can be harmful to your business. Having a business continuity plan in place can help you manage such situations.
Once you have identified business risks, consider obtaining suitable insurance for your business as this will provide additional protection for your assets from the risks you cannot mitigate, such as accidents, natural disasters and lawsuits.
• In some situations, you may be legally required to have business insurance. The most common legally-required insurance is employers' liability insurance to cover for when employees are injured or become unwell in the course of business. Service providers may be also required to have professional indemnity insurance which will cover for professional negligence. Retailers may be required to have buildings insurance for their premises to cover for damages to visitors while in their shops and third-party liability.
How much insurance will cost depends on the types of insurance you need, what range of coverage you want and other factors such as the size of your business, your insurance provider and the countries you are operating.
• Make sure you take out any insurance cover that is mandatory for your business and also insure against events you would not be able to pay for on your own. Some insurance premiums are expensive and it is often worth shopping around to see what is on offer. Before you make a purchase, explore what protections you currently have under any existing insurance policies to ensure that there are no unnecessary overlaps.
• Be vigilant about any uninsured risks and look out for conditions attached to pay-out under insurance policies. Most insurance policies require insurers to be notified within a particular period, or in a particular manner, of a loss or a claim, or of circumstances likely to give rise to a loss or a claim. The interpretation of insurance contracts varies according to the national legal system. Whatever the wording of the notification clause, it is sensible to inform your insurers immediately upon becoming aware of a possible claim and to provide your insurers promptly with the full details of any claim.