What is Risk Management?

10 minute read Published on Dec 7, 2021 | Last updated Mar 8, 2022 by BrokerLink Communications

What is Risk Management?

All businesses and non-profit organizations face the risk of unexpected incidents, such as a natural disaster, loss of funds through theft, or injury to staff, customers, or visitors on their premises. Any of these events can cost your business money and potentially cause a permanent closure. A risk management plan can help you prepare for the unexpected and protect your business from long-term damage.

At BrokerLink, we are passionate about helping business owners understand insurance and we offer a number of risk management services to help owners identify potential impacts to their business.

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What is a risk management plan?

Risk management is the process of identifying possible risks, problems or disasters and then implementing mitigation measures before they happen. A risk management plan is a written document that details the organizations risk management process. The stakeholders of a business or organization can proactively identify and evaluate the impact of all potential risks to their business, and plan accordingly for each risk. Once procedures are created, the staff is trained regularly to help avoid or minimize the impact of each risk, and at the very least, help cope with its impact.

What are the types of risks to consider?

There are three main types of business risks to consider when creating a risk management plan: hazard, business, and strategic.

Hazard risks

A hazard risk is the most common that comes to mind and includes anything that is a physical loss. Examples of hazard risks include slips and falls, jobsite injuries, natural disasters, mechanical breakdown, terrorism, and pandemics.

Business risks

Business risks affect the finance and operations of a company, including compliance issues, process and procedures, aging population, absenteeism, sexual misconduct and abuse, and retention.

Strategic risks

Strategic risks can impact the value or worth of your company. Usually, the issues arising from strategic risks are longer term, for example: it can take years to improve a company’s culture in order to better manage the risk of high employee turnover. Other examples of strategic risks include corporate reputation, employee wellness, cyber and technology risks, low productivity, employee engagement, and succession.

Note: many risk examples can fall under more than one type of business risk.

Benefits of a risk management plan

The process of developing a risk management plan can be beneficial to your business.

A risk management plan helps your company identify risk

Working through the risk management plan process with your team, will help you to brainstorm and identify key risks that impact your business now, and emerging risks that may have an impact at a future time. Risk awareness is a helpful practice and is the first step to helping your business be prepared.

A risk management plan can help your bottom line

Managing your risk can be a smart financial choice for business owners. When risks are minimized, the money spent on losses can be saved. For example, if the risk of theft is high in your area, training your staff and purchasing the necessary security equipment, can reduce that risk. If the instance of theft declines, so too will the cost of your continual repairs or replacement of stolen items – that money will be saved.

A risk management plan makes for consistent and efficient operations

Implementing detailed risk plans throughout your organization and then training your staff on those procedures, can ensure safe and efficient operations. A culture of risk is created within your organization where all staff have a heightened awareness of the risks your business faces, and they work together to reduce those risks.

A risk management plan leads to more satisfied customers

Risk management is often synonymous with safety. Just by making risk management a priority, your premises will automatically feel like a safe environment. Your customers will know that their safety is top of mind and may be more willing to engage with your business.

Having a risk management plan is fiscally prudent

A risk management plan can help you make careful financial decisions to avoid the impact of unnecessary risks to your business.

A risk management plan improves a company’s brand

Brand reputation carries a lot of weight. A company that has considered its risks, usually promotes a safer work environment, leading to staff and customers who are more willing to promote the brand.

How to create an effective risk management plan for your business

Building a robust risk management plan can help position your business to not only survive but succeed when unforeseen circumstances arise. The steps below illustrate how to create a risk management plan that works for your business.

1. Set objectives

Establishing objectives helps the organization align the risk management process with their goals.

For example, you’re the owner of Five Star Restaurant & Bar with a goal to improve your bottom line by 10%. How will a risk management plan help you achieve that goal? We break it down in the steps that follow.

2. Risk awareness: identify risks

The second step is meeting with stakeholders (including your insurance advisor), who are committed to improving the risk mindset of your organization. Ask yourselves: what can go wrong? Make a list and identify the many risks that could impact your business.

To continue with the example above: you and your management team at Five Star Restaurant & Bar settle on a list of risks that includes the following: labour shortages, fire safety, workplace injuries, brand reputation, supply chain issues, high employee turnover, foodborne illness, and vandalism.

3. Risk assessment: prioritize risks

Once you have a list you’re satisfied with, start to prioritize the risks in order of the ones most likely to occur with the highest impact. Create a rating scale to help you measure this. It might be overwhelming to tackle the entire list, so set a goal and tackle those with the highest likelihood and greatest impact. Also consider which risks align with your company objectives. Don’t scrap the rest of the list because sometimes the priority of a risk may shift.

Of the eight risks listed for Five Star Restaurant & Bar, the following ratings were assigned: the higher the rating, the more likely this risk could occur and the greater the impact to the company.

Risk Rating (1-10)
Labour shortages 7
Fire safety 8
Workplace injuries 6
Brand reputation 5
Supply chain issues 8
High employee turnover 9
Foodborne illness 6
Vandalism 4

Fire safety, supply chain issues and high employee turnover are the three risks that have a higher likelihood of greatly impacting Five Star Restaurant & Bar’s bottom line, if left unaddressed.

4. Risk analysis: evaluate the risk

Once a risk is prioritized, put an estimated dollar value beside each risk to quantify how much it may cost your business should this risk occur. While some aspects of a risk could be covered by insurance, there may be components that are not covered yet still costing your business money. What is the cost of staff hours and salary dedicated to managing the consequences of a claim? What is the cost of disengaged employees and lost productivity due to poor company culture, employee unwellness or harassment? What is the cost of poor brand reputation?

How to evaluate a risk:

Company: Five Star Restaurant & Bar
Risk: High employee turnover

  • Cost to recruit an employee: $1,000 (incl. job ad creation, job postings, time and salary for manager to review resumes and conduct interviews)
  • Cost to fully train an employee (3 months and 25% of their wage): $10,000
  • Total cost for Five Star Restaurant & Bar to hire an employee: $11,000

Consider how costly the risk of high employee turnover can be to a business if you need to hire new employees every six to eight months. How can a plan be created to mitigate this risk and save the company money? Improving employee engagement and creating a better company culture could help Five Star retain its employees.

5. Risk Tolerance

Once your team calculates the estimated cost for each risk, you can assign a strategy for managing that risk.

Five strategies for managing risk:

  • Prevent or avoid: these are usually more serious risks that you want to prevent from happening as much as possible.
  • Mitigate: some risks are difficult to prevent, however their impact can be reduced or mitigated with a good risk management plan and trained staff.
  • Transfer: move the risk from one place to another or avoid responsibility for it.
  • Finance: this is where insurance placement falls. Some risks are better insured.
  • Assume: some risks are so minor, or seen as a regular occurrence of business, that paying out of pocket is a risk that you can take should an incident happen.

Each of these strategies has its advantages and disadvantages. That’s why evaluating each risk and understanding the best strategy to manage it can help when creating your risk management plan.

Five Star Restaurant & Bar decides to mitigate the risk of high employee turnover to reduce the unnecessary costs of continuously hiring and training new staff.

6. Risk management plan

The final step is to create a plan for each risk that you have evaluated. The document contains the details of the risk assessment, risk analysis and the tolerance or strategies for the risk. It also highlights policies and procedures for how you plan to mitigate the risk and can help when training your staff.

For Five Star Restaurant & Bar they’ve decided to do the work to improve company culture, including better shift scheduling, an employee wellness program and other incentives to make it more attractive for prospective hires, and to help retain their senior staff. They also increased their minimum wage to be more competitive with other restaurants in the area.

Create a risk management culture in your business

Risk is everyone’s responsibility! However, it starts from the top. When management is engaged and committed to creating a culture that understands and identifies risks, it also promotes safety.

If your staff are trained from day one to work safe, the culture of your business will change. Risk management is not just about safe work, it’s a mindset: if you work safe, you think safe. Employees won’t just walk by the sign that is about to fall, they’ll take the necessary action to reduce or remove the hazard until it can be fix it. If you have a workplace where visitors and staff feel safe, they’ll return.

The role of insurance in risk management

Insurance coupled with a risk management plan can help to ensure your business has the added protection it needs when the unexpected occurs.

As a business owner, your work hard to avoid a multitude of risks daily. Some of these risks, like a natural disaster, can devastate a business, even forcing it to permanently close. Insurance can provide financial security to help keep your business afloat, even after the unthinkable happens. In addition to having insurance, having a robust risk management plan can help to further minimize your financial losses when you submit a claim.

Align your risk management plan with the right insurance coverage

Now that you have a better understanding of the importance of a risk management plan to your business, it’s time to support it with the right insurance coverage. At BrokerLink, our business is your business. Our insurance advisors also understand business risk and are here to answer your questions.

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Risk Management Plan FAQs

Is a risk management plan necessary?

Developing a risk management plan for your business can help you understand the risks that may impact it and help you and your team better prepare. By creating a business culture that is risk-aware, there is a better chance you and your team can spot hazards, identify risks and mitigate them before they turn into claims and cost you money.

What are the difficulties in developing a risk management plan?

It may seem impossible to know all the risks that could impact your business. However, a risk management plan can start off with the risks you are aware of and can evolve over time.

What are some examples of emerging risks?

Emerging risks are defined as “new risks or familiar risks that become apparent in new or unfamiliar conditions” (The international Risk Governance Council). Examples could include new and evolving technology like artificial intelligence or genetic engineering, cyber risks, or climate change to areas that have not experienced the impact yet. Having discussions about emerging risks with your team can help your business better prepare.