WHEN most businesses think about risk management their focus is on plant and equipment and operational risks.
But there are many other aspects of risk that do not always attract sufficient attention.
One example is failure to focus on the business disruption that could flow from damage to property or stock.
The flow-on effects can include a fall in turnover and an increase in costs for running and rebuilding the business, including regaining lost customers.
These can often have a far more devastating effect than the direct loss or damage to property, according to EBM’s specialist services manager Ian Craft.
Mr Craft said approximately eight out of 10 businesses that did not have business interruption insurance failed following a serious fire.
He recommended that owners or partners in a business should have a succession plan to protect against unforseen circumstances.
This could include buy-sell options to ensure the appropriate succession in the event of death, disablement or resignation of a key employee or shareholder.
Workers compensation is another area where many small and medium enterprises (SMEs) do not properly manage their risks.
“A major oversight by many SME employers is the lack of a pre-employment medical before engaging new employees,” Mr Craft said.
“This can result in placing a worker in a style of work that may not suit their physical well being and result in lengthy and costly workers compensation claims that could easily have been avoided.
“For example, a worker whose duties include some lifting may already be suffering from a degenerative back condition.”
Mr Craft pointed to technology risk as another area that needs careful attention.
“It is essential today that businesses maintain duplicate computer records with regular backups and keep copies off site so that in the event of a major loss to their computer system, the costly work of restoration is minimised,” he said.
Mr Craft also recommended effective virus protection and firewalls to protect against viruses and computer hackers, especially as most insurers are now tending to exclude ‘cyber’ risks.
Another risk factor that may warrant more attention is fraud, which is surprisingly rife, according to OAMPS Insurance Brokers State manager Max Bailey.
“When businesses grow, they often overlook fairly basic processes,” Mr Bailey said.
“We look at the whole process from point-of-sale to the bank. Who authorises payments, who handles the money, and so on?”
The need to adopt a broad view of risk is supported by Aon’s biennial risk management and risk financing survey of major international companies.
In 1995, the risks that most concerned companies were the traditional ‘insurance’ risks, such as fire and employers’ liability.
By 2001, the focus was on ‘business’ risks such as ‘loss of reputation’ and ‘failure to change’ followed by ‘business interruption’.
While brand management is often seen as the exclusive domain of big companies, the reality is that many small and mid sized companies have built up substantial brand value.
The issue of ‘business interruption’ can go beyond the impact of damage to a company’s own premises or stock.
Aon Holdings Australia chief executive Peter Harmer said it also reflected the widespread adoption of ‘lean’ production systems, with minimal just-in-time inventory.
“There have been several significant recent examples of the business interdependency exposures now faced by major businesses,” Mr Harmer said.
These include the fire in 2000 at a Philips Semiconductors’ plant in New Mexico.
“The cost of the physical damage was around $15 million, but the contingent business interruption losses experienced by Ericcson and Nokia, who used parts from the Philips plant for their mobile phones, may exceed $485 million,” Mr Harmer said.
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