Consultants Advise Firms to Assess Risks Before Insurance
Before purchasing insurance, companies must first grasp their internal operations and risk tolerance, advises the management consulting firm JPIC Group. This involves a thorough analysis of the organization’s business model and the potential risks it faces.
Praveen Sharma of JPIC Group emphasizes the importance of identifying risk locations, determining which risks can be retained, and deciding where insurance and risk financing fit into the overall strategy.
According to JPIC Group, organizations often fall into the trap of letting insurance renewals dictate their risk financing approach, rather than the other way around. After assessing their business model, companies should evaluate their risk appetite and tolerance.
James Purvis from JPIC Group clarifies that risk appetite and tolerance, though often confused, are distinct concepts. He states, “The terms are often misunderstood and often used together, but they are not interchangeable. Insurance strategy should reflect the individual organisation’s appetite and tolerance for risk.”
Risk managers need to address critical questions, such as identifying primary risks, potential loss-bearing entities, and their locations. They must also consider which risks could significantly impact financial and operational goals.
JPIC Group highlights additional key questions: the organization’s financial loss absorption capacity, the purpose of insuring each risk, and the value of such insurance. These inquiries are vital for a full risk assessment.
A thorough review of risk appetite and insurance strategy requires input from various departments, including finance, tax, operations, legal, property, technology, and senior leadership, not just the risk or insurance team.
The goal, as JPIC Group explains, is to establish a shared understanding of key exposures, financial capacity, loss history, risk controls, and strategic priorities within the organization.
Risk financing decisions should consider existing controls and align with the broader business strategy. Organizations must understand their risks, financial capacity, and volatility tolerance before determining insurance needs.
Sharma asserts, “Before asking what insurance to buy and why, organisations need a clear understanding of their risks, their financial capacity and their willingness to accept volatility. Only then can they make properly informed decisions about what to retain, what to control and what to transfer. The insurance buying strategy should be the outcome of the risk conversation – not the starting point.”
JPIC Group emphasizes that a structured approach to risk management is key for informed insurance decisions. Organizations must assess their risk appetite, tolerance, and financial capacity to develop an effective insurance strategy.
The firm recommends involving multiple stakeholders from diverse departments in the risk review process to ensure a full understanding of organizational risks and priorities.
