Fundamentals of Risk Management

Risk response
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will be paid when one of the identified events occurs. The history of the particular 
insurance company in relation to the payment of claims and the reputation of
that insurance company will be important factors when deciding which insurance 
company to appoint.
For very large organizations with considerable assets, one insurance company on 
its own may not be willing to offer coverage up to the full value of those assets. 
When buying insurance, the organization will need to think about the capacity that the 
insurance company is willing to offer in relation to the value of the assets/exposure 
that need to be insured.
Many insurance companies offer services in addition to insurance. These may
include loss control services and assistance with business continuity planning. The 
capabilities of the insurance company in these areas may be an important factor in 
deciding which insurance company to choose.
An increasingly important issue for buyers of insurance is the financial security, 
status and capabilities of the insurance company. The nature of the business model 
operated by insurance companies means that they receive premiums at the beginning 
of the policy, but do not have to pay claims until some, often considerable, time after 
the event or loss. This results in a positive cash-flow position for insurance companies 
and the associated opportunity to earn investment income.
However, diversification of insurance companies into higher-risk financial activities 
has resulted in significant losses for some of them and a downgrading of their financial 
status. Also, low interest rates and the poor performance of stock markets has
resulted in a reduction in investment income. Accordingly, buyers of insurance need 
to pay greater attention to the financial status or credit rating awarded to individual 
insurance companies when making decisions about which company to use.
Reference has already been made to insurance claims and the vital importance of 
insurance claims in relation to insurance. Apart from statutory and client require-
ments, the only reasons an organization buys insurance are to cover the increased 
cost of operation, recover the cost of repairing the damage and restoring the business 
following a loss. In respect of third-party insurance, it is the third-party injured
person who will make the insurance claim.
The handling of insurance claims can be a detailed and forensic exercise. 
Sometimes claims handling involves complex legal procedures involving specialist
engineers and accountants. Property damage claims may be easier to quantify, but 
claims associated with the business interruption element of the loss can be very
difficult to measure and agree.
If an organization has devised adequate business continuity plans, the disruption 
to the business and the size of the insurance claim will be much reduced. In risk 
management terms, depending fully on insurance to make good all losses is not
sufficient. Every organization should look to its business continuity plans to ensure 
that arrangements are in place to guarantee minimum disruption should an adverse 
event materialize.
There is increasing concern about compliance issues in relation to insurance
policies. Most countries have introduced insurance premium taxes and these must
be paid on a national basis where an organization has assets in several countries. 
Sometimes, the requirement to pay taxes may be on a city or regional basis, with the 
payment going to the local fire brigade. Compliance issues have also extended to the 

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