What’s the Relationship Between Business Risk and Insurance Risk

Business risk broadly refers to the potential for losses or operational disruptions stemming from internal or external factors. These factors may include market changes, regulatory compliance issues, operational failures, supply chain disruptions, and strategic decision-making challenges.

Insurance risk refers to the potential financial losses covered by insurance, including property damage, liability claims, product recalls, business interruption, and workplace injuries.

The two risks intersect because effective management of business risks typically reduces the likelihood and severity of insurance claims, resulting in improved insurance terms and potentially a reduction in premium cost.

How Business and Insurance Risks Are Connected

1. Direct Correlation

• Effective business risk management reduces both the frequency and severity of insured events.
• Poor business risk management practices increase the likelihood of claims, which can lead to higher insurance premiums.

2. Financial Stability

• Businesses facing significant unmanaged risks may be perceived by insurers as higher risk, which can impact underwriting decisions and potentially lead to increased insurance premium costs.

3. Operational Continuity

• Proper management of operational risks ensures continuity, which may lead to a reduction in claims related to business interruptions and loss of income.

How Quality Standards (e.g., ISO 9000) Reduce Business and Insurance Risk

Quality management standards, such as ISO 9000, provide a structured framework designed to systematically reduce business risks, which in turn may lower insurance risks.

1. Operational Efficiency & Process Control

• Business Risk Reduction: Standardizing and documenting processes reduces errors, waste, and rework.
• Insurance Risk Reduction: Fewer operational failures typically result in fewer product defects, which in turn may lead to fewer claims related to liability or product recalls.

2. Consistent Product Quality

• Business Risk Reduction: Reliable products minimize returns, customer dissatisfaction, and market share loss.
• Insurance Risk Reduction: Consistent quality decreases potential liability from defective products, which potentially may lower the company's exposure to product liability insurance claims.

3. Regulatory and Compliance Adherence

• Business Risk Reduction: Meeting compliance standards helps reduce fines, legal actions, and regulatory disruptions.
• Insurance Risk Reduction: Decreased exposure to compliance-related litigation and regulatory claims may lower legal liability and professional indemnity risks.

4. Improved Supplier Management

• Business Risk Reduction: Supply chain disruption continues to plague the industry. Reliable supplier relationships lower the likelihood of supply chain interruptions.
• Insurance Risk Reduction: Reducing disruptions due to the supply chain may result in fewer claims related to business interruption or contingent business interruption coverage.

5. Traceability

• Business Risk Reduction: Improved traceability may allow for quicker identification and resolution of problems.
• Insurance Risk Reduction: Faster and more effective responses decrease claim severity, especially in liability and recall situations.

7. Continuous Improvement Mindset

• Business Risk Reduction: A continuous improvement mindset helps mitigate the risk of the business becoming stagnant, which can result in a loss of market competitiveness and potentially lead to product obsolescence.
• Insurance Risk Reduction: Organizations actively seeking improvements tend to experience fewer incidents, thereby reducing claim frequency.

Manufacturing companies that have obtained certification to quality standards, such as ISO 9000, are required to, at a minimum, audit their quality system annually. Frequently, these organizations rely on internal auditors to evaluate the performance of their quality system. However, there are distinct advantages to using an external 3rd party auditor versus their internal audit team:

• Objectivity and Impartiality: External auditors are free from internal bias, which enables them to evaluate processes objectively without being influenced by internal political or operational factors.
• Expertise and Specialization:
  • Third-party auditors typically have in-depth knowledge of industry-specific quality standards (e.g., ISO 9001, AS9100, ISO 13485).They may also offer best-practice insights and
  • benchmarking from various industries or similar organizations.
• Improved Compliance and Risk Management
  • Independent audits help identify compliance gaps that internal teams might overlook or underestimate.
  • They provide detailed and actionable feedback on opportunities for improvement to systematically reduce risks.
• Enhanced Regulatory Adherence: External Third-party auditors may have a better understanding of current regulatory changes and interpretations. This familiarity reduces the risk of compliance issues, penalties, and operational disruptions that can arise from regulatory non-compliance.
• Benchmarking and Industry Insights: External third-party auditors may offer additional insights into best practices and benchmarks from similar organizations. This may help organizations understand their standing relative to industry standards, promoting continuous improvement.
• Resource Optimization: Engaging third-party auditors enables internal resources to focus on core business activities.
• Reduced Insurance Premiums and Liability: External audits minimize business risk, decreasing liability risks and related insurance premiums.

Business and insurance risks are interlinked improvements in business risk management, which may reduce the company's insurance risk. Implementing quality standards, such as ISO 9000, mitigates operational, compliance, product, and supply chain risks, which directly contribute to lower insurance exposure, improved risk profiles, and more favorable insurance terms.

Leveraging an external third-party audit adds significant value by providing impartiality, credibility, risk reduction, and insights into continuous improvement, thereby enhancing an organization's overall quality system and market reputation.

AssuredPartners' knowledgeable manufacturing team can provide you with assistance in conducting a third-party audit of your quality management system. Contact us to learn more.