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Risk vs. Insurance: which is your choice? 

Deccan Herald , Nov 07, 2016

In today’s corporate culture, businesses strive to gain strategic advantage over each other with cutting-edge technology and hitherto unseen customisation.

However, with advancement in techniques and globalisation, there is an increased vulnerability towards all kinds of risk. Thus, while minimising costs and offering the best services continue to be one of the top business agendas, companies are now looking at enhanced gap analysis techniques for managing risks emanating out of such rapid change.

According to a recent India Risk Survey (IRS), 2015, conducted by the Federation of Indian Chambers of Commerce and Industry (FICCI) and its partners, risks such as corruption and corporate frauds, information breach, and manmade and natural calamities threaten the economic standing of a country and subsequently its industries.

Manmade and natural disasters raise their heads periodically and continue to threaten organisations. Terrorism ranks among one of the top five risks owing to the recent acts of terrorism across the world.

The Indian landmass is susceptible to a huge number of natural disasters. The approximate economic loss incurred due to natural disasters usually reaches $1 billion, as observed in J&K Floods of 2014, and was recorded at an astonishing $7 billion, during Cyclone Hudhud in the same year. Although the quantum of loss in India is considerably less compared with calamities across the globe, the percentage of insured losses were abysmally lower than the global average; which means, Indians are paying out-of-pocket expenses to restore and reconstruct businesses and homes back to normalcy.

The impact on businesses due to the above mentioned risks cross billions in revenue. Some of the measurable losses include cost of rebuilding and sourcing, business interruption, loss of trust among staff, penalties and compensation, and loss of productivity, among others. To protect your business from such risks, the first step is to identify potential risks. Begin with the objectives of your organisation, possible threats, and key factors that influence your business. Ideally, a SWOT (Strengths, Weaknesses, Opportunities and Threats) Analysis will help gauge some of the common risk sources.

Availability of raw materials, higher supply costs, inconsistent quality, higher frequency of cost fluctuation, and the number of suppliers are the possible risks under supply chain management. Unreliable customers, social changes in buying patterns, change in demands and costs are common risks that affect the revenue of an organisation. Financial risks including external factors such as unprofitable currency exchange rates and lack of reliable financing can affect the management.

Risk transference is where insurance steps in. The insurance company is the willing third party to whom the financial part of the risk is transferred in exchange of a nominal amount. Insurance works on the law of large numbers to estimate the probability of entities under the same risk claiming for compensation.

Thus, various risks are grouped under different types for a focused approached. These include industrial property, general liability, workmen’s compensation, professional liability, product liability, marine, hospitalisation, personal accident, fidelity guarantee, credit burglary, money, crop and other related risks.

Apart from the above-mentioned types, there is an option to choose a customised insurance coverage suitable for your business. With changing times, insurance too has evolved to include innovative solutions. It no longer requires tedious paperwork and multiple trips to the insurance company. Easily accessible web portals and one-click purchase platforms enhance the buying ease for policyholders.

The focus of insurance products has also shifted from just coverage; they also take into account the various gaps in risk management and include pro-active risk mitigation and improvement plans. Finally, it is the business of business to take risks. To anticipate risks and implement comprehensive risk transfer, mitigation and improvement plans is the smartest way of doing business in an increasing volatile and uncertain business environment.