Risk is an unfortunate but inevitable part of doing business and must be dealt with immediately and in an ongoing capacity. Insurance is the simplest method of mitigating and managing risks. If your business is uninsured when an accident or incident occurs, or a business transaction turns sour, the costs can spiral out of control and your organisation could fail.
Having a sound level of insurance will assist you in reducing risk and giving you the power to become more successful.
By the end of this chapter, you will understand:
- Risk protection
- Insurance
- Compulsory insurance
- Other insurance
- Personal and workers insurance
- Liability insurance
- Probability and impact of risks on business
- Develop and implement risk treatment plans
Before any other action is taken, you must know and understand the laws and regulations that your business is bound by. Adding insurance to this will keep your company watertight. Different legislation applies to different industries and businesses.
These laws depend on:
- The type of business, sole trader, private company etc.
- Ownership or rental status of plant, machinery, property or assets
- Local, state and commonwealth government legislation
Insurance policies can be purchased to cover a very broad range of business risks. Most types of insurance policies are voluntary (and advisable), but some can be compulsory. This depends on the industry your business operates within. Insurance types appropriate for your organisation can include:
| Building and contents | These policies cover the property, contents, assets and stock of your company against fire, plumbing flood, malicious damage, as well as against natural disasters such as lightning strikes, storm damage and flooding. |
|---|---|
| Burglary | A burglary insurance policy covers your company assets against break-ins and theft. This is vital insurance for a business that keeps large amounts of stock or cash on a site that is not always attended. |
| Business interruption or loss of profits | This insurance will cover your business if trade is interrupted or halted by damage to your property through, for example, a fire or some other insured damage. It will ensure that your expenses are covered and that your cash flow is maintained. |
| Employee dishonesty | This will cover you for any losses that you suffer as a result of employee theft or embezzlement. |
| Tax audit | Tax audit insurance assists with any fees you incur as a result of your organisation being audited or investigated by taxation authorities. |
To protect yourself and your business against expensive compensation claims, you should seriously consider taking out one or more of the following insurance policies.
If someone is injured, made ill or killed in the course of duty for your company, you must have adequate insurance protection to cover hardship and loss for yourself, workers and their families.
It is important to note that workers compensation is covered by separate state and territory legislation, but is mandatory regardless of location.
Public liability insurance will protect your organisation against all financial risks of being found liable for the death or injury of a third party or for loss or damage of property. It also covers ‘pure economic’ loss resulting from your negligence. Regardless of business size, it is important that you consider insuring your business for public liability.
If you are self-employed then worker’s compensation will not apply to you, so the law recommends that you obtain accident and sickness insurance through a private insurer.
When you run a company, you could be responsible for any damages or injuries to people or property. Liability insurance is usually optional, but is recommended as such legal issues can be very costly and ultimately fatal for your organisation.
Types of liability insurance that you could take out can include:
As discussed previously, public liability insurance will protect your organisation against all financial risks of being found liable for the death or injury of a third party or for loss or damage of property. It also covers ‘pure economic’ loss resulting from the negligence of your business.
This type of policy protects advice-based businesses from any legal action taken for losses incurred as a result of perceived professional negligence i.e., the provision of ‘bad advice.’
This insurance is particularly relevant if your company deals in goods or their repair and service. If your goods or services cause injury, damage or death then you could be open to financial claims which could seriously damage your company and its ability to continue trading.
Resource
Read about types of insurance to learn more.
Think
Think about your workplace and the business tasks you undertake. What type of insurance is compulsory and which other insurance policies would be advisable?
Key steps in risk management process are as follows:
- Decide the areas of business impacted
Before you create a risk management plan, think about which areas of your business it will refer to. For example, you might only be interested in hazard-based risks. Some of the internal and external things to think about when creating your plan are:
•social, cultural, political and regional issues
•economic, technology and competitive trends
•government policies and law
•your business aims, policies and strategies.
- Consult with Stakeholders
Your risk management plan will be more specific and useful if you ask for feedback from the people, businesses or organisations you deal with.
Stakeholders can include:
•employees, contractors and sub-contractors
•clients, customers and suppliers
•business financiers, investors and insurers
•your local communities and local media
•government agencies.
Consulting with stakeholders will help you to:
•work out what your business considers as high and low risk
•get support for your risk management plan
•bring together different views and areas of expertise
•keep your risk framework up to date
•respond to unexpected risks.
- Identify the risks
Working out the risks to your business could be as easy as thinking about what could go wrong, and how and why it could happen. You might also need to do some research into:
•past events and risks
•possible future changes to your business environment, such as changes in economic trends
•social and community issues that could affect your business
- Analyse the risks
After identifying the risks to your business, it’s time to work out which ones are urgent. Our risk analysis template helps you to do this.
To analyse the risks of an event, you should first look at the:
•likelihood of the risk happening
•consequence/damage if the risk happened.
Work out a rating system for likelihood and consequence. For example, you could have ratings of:
•1 to 4 for likelihood (1 for highly unlikely and 4 for highly likely)
•1 to 4 for consequence (1 for low and 4 for severe).
Use these ratings to work out the risk level.
- Evaluate the risks
Risk criteria set a standard to assess risks to your business. To set your risk criteria, state the level and nature of risks that are acceptable or unacceptable in your workplace. Our risk assessment template provides an example of a risk level guide to help you evaluate risks.
To evaluate risk, compare the level of risk for various events against your risk criteria. You should also check if your existing risk management methods are enough to accept the risk.
- Treat the risks
Your evaluation will have helped you to identify any risks that need to be treated. Develop a plan to treat risks, so you can:
•identify each risk type and the level of risk to your business
•suggest strategies to treat each risk
•create timeframes for each strategy
•decide who's responsible for specific parts of the plan
•work out resources required such as money, staff and external help
• schedule future action such as regular checking and updating of risks, if needed.
- Commit to reducing risks
Committing to quality risk management can help you create a stable business that prepares for unexpected events.
As a business owner, it's a good idea to:
•make sure your business aims link to your risk management plan
•clearly describe your risk management plan to everyone in your business
•show support for risk management
•set up a way of measuring the success of your risk management plan
•regularly check that your way of measuring is giving you useful information
•make it clear who's responsible for what
•provide enough resources at all levels of your business
•ask for feedback from everyone in your business, including customers and suppliers
•use feedback to update your plan
•explain risk management to new employees and in training programs.
for more information on risk management process check the website: https://business.gov.au/risk-management/risk-assessment-and-planning/assess-and-manage-risk
A risk treatment plan is a system or risk mitigation which you should develop and implement as soon as you start a business.
The plan does the following:
- Provides a summary of identified risks relevant to your operations
- The appropriate responses for each risk
- Identifies the people responsible for each risk
- Timelines for applying risk treatment
A risk treatment plan is developed after your organisation completes a risk assessment for the whole business. The risk assessment identifies the threats your organisation faces and their potential severity. The treatment plan then explains in simple terms how you must manage those risks.
There are four generally-recognised options to decide upon when responding to a specific risk.
- Treat: This is when a risk has been identified and can be dealt with within the organisation using specific controls.
- Tolerate: A risk is tolerated when it is deemed to be of such insignificance or unlikelihood that it is not worth spending any time or money on mitigating.
- Terminate: This is when a risk is identified that can be dealt with by ceasing an activity or business practice. An example might be company use of an outdated type of software is halted and new software implemented.
- Transfer: Transfer relates to the movement of a risk to a third party such as an insurance company.
Resource
Read about types of risk treatment to learn more.
Watch
The following video, produced by Steadfast, discusses the types of insurance a business might need.
Use the following questions to check your knowledge.
- Explain ‘public liability’ insurance.
- Describe what is meant by ‘risk protection.’
- Explain ‘professional indemnity.’
- Describe the areas that burglary insurance should cover.
- Explain and describe a ‘Risk Treatment Plan.’
