Insurance ≠ Risk Management
Often in my career, I hear the terms Insurance and Risk Management interchanged. This is a limiting and incorrect assessment. Risk Management is a broader discipline that includes a deliberative and thoughtful process that enhances better decision making.
Risk management is about making an active choice to decide whether to accept, avoid, mitigate or transfer risks before the risk occurs. It is only in the transfer stage where insurance fits in.
I have summarized other key differences below:
Risk Management:
Broader framework: Considers all risks, not just insurable ones.
Initiative-taking: Involves anticipation of challenges and is a process to identify, assess, and mitigate potential risks before they occur.
Internal focus: Concentrates on protecting the organization and supports a risk management culture where employees have accountability.
Preventive: Training and preparedness are essential to reduce the likelihood and impact of risks.
Continuous process: Requires ongoing monitoring to measure effectiveness and is adaptable to change.
Insurance:
Reactive: One tool that offers financial protection after a covered risk occurs.
Limited scope: Will only cover specific risks as outlined in the insurance policy.
Risk transfer: Shifts the financial burden of covered losses to an insurer or third party.
One-time solution: Typically renewed and underwritten on an annual term.
External focus: Financial support is only provided to the organization/insured upon insurer review and approval.
Having a solid risk management program combined with the added protection of insurance can be an effective strategy. Using risk management metrics can allow your organization to select appropriate limits, deductibles and types of coverage that fit with your organization’s risk appetite.
But remember, insurance tends to be one of the most expensive options and coverage forms can vary not always covering a loss at 100%. Insurance premiums are also volatile and trading dollars is not always the most effective way to manage risks.
By including risk management in your organization’s strategic planning combined with well-informed risk transfer mechanisms such as insurance, you can minimize disruption, better navigate uncertainty, build operational resilience, and optimize resources to achieve your organization’s mission and goals.
