The Role of Insurance in Corporate Risk Management Strategies *

For larger organisations, corporate risk management strategies play a vital role in ensuring business continuity and operational resilience. Among the various tools employed to manage and mitigate risks, insurance can significantly contribute by providing financial support and enhancing a company’s ability to recover from unexpected events. Here, we explore how larger organisations may integrate insurance into broader risk management frameworks to enhance resilience and safeguard their operations.

Insurance as a Pillar of Risk Transfer*

Harvard Business School defines risk management as “the systematic process of identifying, assessing, and mitigating threats or uncertainties that can affect your organization. It involves analysing risks’ likelihood and impact, developing strategies to minimize harm, and monitoring measures’ effectiveness.

Risk management is important as it can protect an organisation’s reputation, minimize losses, encourage innovation and growth and enhances decision making. Insurance can be used as a risk management tool which shifts the financial impact of certain risks from the business to the insurer, this is also known as risk transfer.

Public & Products Liability Insurance transfers the cost of serious bodily injury or property damage claims from the business to the insurer for a premium which is paid by the business.

Industrial Special Risks Insurance transfers the cost of property related claims (e.g., fire or storm damage) from the business to the insurer for a premium which is paid by the business.

Enhancing Resilience Through Comprehensive Planning*

Integrating insurance into a corporate risk management framework require a comprehensive approach. Organisations often conduct thorough risk assessments and work closely with brokers or insurers to customise policies that align with their specific risk profiles.

“For material risk, an in-depth analysis of the physical assets, their location and their exposure to weather events such as flood and bushfire is required. If a company has physical assets or supplier assets overseas, the cover must reflect that risk exposure from their geography” (ANZIIF, July 2024)

As highlighted in ANZIIF’s article, the broker and their client need to work together to assess a business’s risk exposures and tailor the ISR policy suitably to match their “unique risk profiles” (ANZIIF, July 2024).

For instance, a manufacturing company may have the exposure for damage to both the building and equipment at the premise due to accidental damage. They also need to assess the impact this damage would have on revenues and therefore business interruption cover.

Complementing Other Risk Management Measures*

Insurance may be most effective when used alongside other risk management measures. For instance, strong quality control and assurance procedures, implementing safety protocols, robust cybersecurity measures and implementing internal controls such as employee training may reduce the likelihood of incidents. This layered approach ensures that insurance acts as a financial safety net while other controls actively minimise risks.

Natalia Vanzo, Senior Account Executive at SMART Business Insurance, emphasizes that “businesses with well-defined internal procedures can significantly reduce the impact of serious events. For instance, a wholesale business that stores stock on elevated racking is less likely to suffer extensive damage or operational disruption in the event of a storm or flood. Likewise, companies that invest in cybersecurity training for staff enhance awareness and minimize the risk of phishing attacks leading to major gateway breaches. By implementing risk mitigation strategies alongside comprehensive insurance coverage, businesses can not only reduce the likelihood of incidents occurring but also lessen their impact when they do.”

Additionally, insurers may provide risk management resources, such as property surveys and checklist, which can help businesses identify potential vulnerabilities and implement preventive measures. This proactive collaboration supports a holistic strategy for resilience.

Monitoring and Adapting Strategies*

The risk landscape is constantly evolving, influenced by factors such as technological advancements, regulatory changes, and market conditions.

ANZIIF (July 2024) states, “Supply-chain disruption and rising inflation in some countries will require brokers to update asset valuations as often as quarterly for some large businesses if they are to avoid being under-insured”.

By maintaining a dynamic approach, businesses may adapt to new challenges and protect their interests effectively.

Conclusion*

Incorporating insurance into corporate risk management strategies may enhance resilience for larger organisations, enabling them to navigate complex risk environments with confidence. By integrating insurance with other risk control measures and maintaining flexibility in response to changing risks, businesses may secure a stronger foundation for long-term success.

Disclaimer: The content of this blog article is intended for general informational purposes only and should not be considered as professional advice. While we strive to ensure accuracy, we make no guarantees about the completeness or reliability of the information. For guidance regarding what and how much business insurance cover you need, we recommend consulting with a business insurance broker. Any actions you take based on any information provided here are at your own discretion.

References:

ANZIIF. (Vol 47: Issue 2, July 2024). Supply-chain disruption and rising inflation in some countries will require brokers to update asset valuations as often as quarterly for some large businesses if they are to avoid being under-insured. ANZIIF Journal. Retrieved from https://anziif.com/professional-development/the-journal/volume-47/issue-2/tailored-cover-industrial-special-risk