The risk analysis – a basis for a sensible corporate policy

29 september 2017

Does a risk analysis make any sense? This is not such an easy question to answer. In my view, investing in a risk analysis can pay for itself and strengthen business operations.

When you know the risks in a company, it is simpler to determine the nature and cover of the insurance that is needed. However, do the costs balance out the gains for every company? If an analysis is going to be expensive, is it not then simpler and cheaper to just take out the best all-risk policy?

For a private individual, this question can often be answered affirmatively. Anyone who takes out fire insurance for their house can fairly quickly count on a full and generous amount of cover. If the property was bought for 500,000 euros, then the costs of rebuilding can probably be estimated at 600,000 euros. Allow a little extra leeway and the cover will probably come out at 700,000. It looks like guesswork, but I think that in most cases it will not be any more difficult than this. Even the premium for that extra 100,000 euros does not break the bank.

However, things are a little more complicated for companies. This usually involves larger objects and interests and business activities with inherent risks. Sometimes companies perform work with certain substances, or store hazardous substances that require permits. Whenever I create one of these kinds of analyses, I need to weigh up all kinds of issues. Can the premises just be rebuilt after a fire, or could regulations and the need for new permits make rebuilding more complex and above all more expensive? What are the dependencies? How quickly can the activities in the affected building be resumed elsewhere? And can the machines that are used for the work be delivered rapidly? As you have gathered, a risk analysis is based on asking questions.

Anyone who does this will come across issues that may considerably change the picture. This was noticed by the management of a biscuit factory that saw one of its production sites burn down. The machinery used for a specific type of biscuit was unique and was not available anywhere else in the organisation. It was difficult to find a replacement site and took a long of time to rebuild the burned-down factory. However, what also cost a lot of money on further examination was the fact that even after the payment period agreed with insurer, the production still had to be outsourced to another manufacturer. This was required to guarantee that the product stayed on supermarket shelves during the repair and rebuilding period. These were costs that the company had to bear so as to not be sidelined, given the fierce competition in the market. A good analysis would have revealed that extra risk and the extra (uninsured) loss and would have rung alarm bells before the fire occurred.

Anyone who looks at business risks with these kinds of stories in the back of their mind will probably reach the conclusion that certain risks are worth insuring properly. The greater the setback and the potential consequential loss, the more these should be taken into account in the insurance cover. However, the alternative is also possible. Anyone who concludes from an analysis that there are unexpected risks can decide to take measures for themselves. In this regard, a risk analysis is a tool that provides basic information for taking commercial decisions. Knowledge makes it possible to make choices.

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I think that in hindsight the people at the biscuit factory would have also liked to have taken those kinds of decisions. Then they would have probably spread out the production of the biscuits. In that sense, a risk analysis can provide management information. In my experience, people in a professionally managed organisation want to know those kinds of things too. During a discussion on this theme that I attended recently with fellow professionals, there was also some scepticism about the question of whether a risk analysis may sometimes be overkill and too expensive in comparison to insurance costs. I think that there is a grain of truth in this. If your company is small or the activities and the substances you use are not particularly hazardous, then a risk analysis is probably an investment that you cannot afford. However, for a large company with many business premises and a complex risk picture, the situation is very different. A risk analysis may take months in this case, but then there is also something to be gained compared to a colossal insurance premium.

Fortunately, many business owners in more hazardous industries take responsibility for this themselves. For instance, people in the petrochemical industry are aware of the importance of risk analyses, as in this industry they are accustomed to regular safety audits. Each business owner will have to weigh this up for themselves by looking at the specific situation within their own business. I would not like to be in the shoes of a business owner who has to answer to the courts after a calamity that has serious and potentially avoidable consequences. “What have you done to get a good picture of the risks of your business activities?” is a question that some people find difficult to answer.

Therefore, a risk analysis is part and parcel of running a business. This type of analysis lays the basis for a sensible corporate policy.

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