SMEs are the backbone of the world economy. It is essential to sustain their growth and Success for stronger economies and for better employments. Identifying the Risk involved and handling them through Risk Management process is the only way for averting losses and for business continuity. Insurance companies shall further facilitate SMEs with their proactive risk management services and claims, management skills for achieving common objectives like assessing the risks involved, minimising exposures/liabilities, and avoiding losses in partnership model.
A fire reported in the Warehouse of fast growing Carton box manufacturing unit ultimately caused the facility shutdown. Stock worth 15 Million Indian rupees got gutted due to short-circuit in the warehouse and the civil structure extensively got damaged. Damaged structure was to be demolished for Reconstruction and inthis processprecious 6 months were lost. Owing to out of business for considerable time and financial turbulence, eventually company reported bankruptcy. This is not the only case with this unit. It is reminiscent to note that about 25% of SMEs were never revived post a loss.This situation can be successfully averted by implementing Risk Management framework in decision making, at every level by the Business Houses.
The term “Risk Management”which is often used by Insurance professionals,sounds intimidatingto business houses.However, importance of risk management is intangible and it is a simple commonsense approach towards a possibility of losing or gaining of something. It is critical in enduring the business by being aware of risks involved within the operations carried out, and their consequences on the business. The term Risk is defined as,'Possibility' of “loss or adverse event” that has potential to interfere with the organisation's ability to fulfil its purpose.
The Risk management is anapproach for managing the Risk through constructive sequential activities.For Business Houses, Risk Management helps Identifying Loss Potentials and major deficiencies which do have a direct impact on their business sustainability. It also aid the business houses in
- Protecting their assets against Risks and saving losses&lost time
- Allowing more calculated allocation of resources within the organisation
- Optimising operational efficiencies
- Reducing Man hour losses
- Boosting Moral of the Employees.
- Reducing Insurance Claims and Premium
- The sequential activities in Risk Management Process can be best put in plain wordsconsidering Warehouse Risk management as case study as below.
- Risk Identification is a Methodological study carried out across the activities in the business house to identify the potential risks. In warehouse, Electrification is a Risk and acknowledging it, is Risk Identification.
- Risk Assessment is assessing the probability of occurrence and it's Consequence. In Warehouse, Presence of electrification would create the fire accidents because of electrical short-circuit / overheating. Further, Warehouse located in low lying area is prone to Floods / water loggings.
- Risk Control is the process of selecting the risks which can be controlled and choosing the necessary Activities to prevent Risks. In Warehouse, fire because of electrical short-circuit, Floods are the risks that can be controlled by necessary preventive measures.Concealed electrical cabling inside warehouse &building warehouse on elevated plinths are some of the control measures.
- Risk Avoidance shall be implemented for all High Frequency and High severity risks. For example, Frequently occurring and often expensive losses like floods could have been avoided by not constructingwarehouse in flood prone zones. Similarly, Electrification inside the warehouse can be avoided
- Risk Reduction is achieved through implementation of identified Loss prevention and controlled measures. In warehouse, Fire detection and automatic fire suppression systems like Smoke detectors and fire sprinkler systems shall be opted to reduce the risk.
- Risk Financing is having contingency reserves, Pools, outsourcing / contracting etc.For Warehouse,pre-identified contingency storage places helpful in transferring the stocks in event of floods.
- Risk Retention is a conscious decision to sustain the Low Frequency and Low Severity risks. In Warehouse, leakage of water from the automatic water sprinkler system is the low frequency and low severity risk which can be retained.
- Risk Transferis the modus operandi of transferring the risk to others. The most popular risk transfer method is Insurance.
Insurance is the most accepted and easiest method of transferring the risk to the insurance companies. By this, Business houses are certain that the losses incurred by them will be made good by the Insurance Companies against paying of Premiums. However, priorto itOrganisations need to identify the Risks involved in activities being carried out and their areas of impacts, causes and potential consequences. Necessary measures need to be taken by the organisations by Risk Avoidance, Risk Reduction, Risk Financing and Retainingtechniques before transferring the risk. Transferring whole of risks would be expensive and would result in undesired outgo of premiums. Further, Insurance has its own limitations and exceptions.
For insurance companies, Risk Management is an integral part of their underwriting approach.The risk Management teams analyse the risk involved and quality of the operations of the accounts they underwrite. Risk manager of the Insurance Companies focuses on features /practices at site, Review of systems and procedures. They evaluate Industry 'Best Practices' and compare the extent to which clients' business meets the benchmarks. Risk management helps Underwriters in :
- Selection of Good risks and avoiding loss potential accounts
- Identifying Loss Control / Risk improvement areas of the accounts they write and follow-up for betterment of accounts they hold
- Educating clients aboutsignificance of Risk Management and to achieve objectives
Continuously evaluating the accounts and walking away from mediocre accounts.
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