A fire broke out in the warehouse of a thriving carton manufacturing unit. Stocks worth INR 1.5 crore were gutted, and the civil structure was extensively damaged. The facility was closed for six months so the damaged structure could be demolished and rebuilt. Crippled by cost overruns and delays in reconstruction, the company eventually declared bankruptcy.

This is the story of thousands of SMEs in India every year. Studies show that 25% of SMEs cannot be revived after a loss. But such calamities are not inevitable – they can be successfully prevented by practicing Risk Management at every level of decision-making.

“Risk management” is a structured approach that comprehensively assesses the possibility of loss or damage, and its ability to affect the organisation. Good risk management is the key to the longevity of a business, because it prompts awareness and control of operational risks.

Among its many advantages, Risk Management helps businesses protect their assets against potential losses; allows more calculated allocation of organisational resources; optimises operational efficiencies; cuts man-hour losses; boosts morale; and reduces insurance premiums.

Risk management is an intuitive 8-step process:

Risk Identification is a methodological study carried out across all business activities to identify potential risks, e.g. short-circuits, equipment failure etc.

Risk Assessment means assessing the probability of the risk’s occurrence, and its likely consequences. E.g. sub-standard electrification could cause fires because of short-circuits.

Risk Control is the process of selecting controllable risks, and planning ways to minimise them. E.g. short-circuit risks can be controlled by concealing electrical cabling inside the warehouse.

Risk Avoidance shall be implemented for all high-frequency and high-severity risks. For instance, frequent and costly losses like floods could be mitigated by avoiding construction in known flood-prone zones.

Risk Reduction is achieved through implementation of specific loss-prevention and -control measures. E.g. in warehouses, automatic fire detection and suppression systems like smoke detectors and automatic sprinklers help reduce risk.

Risk Financing is the concept of having contingency reserves and backup outsourcing/contracting plans to mitigate the impact of a loss. E.g. many warehouses keep contingency storage places to transfer stocks in the event of flooding.

Risk Retention is a conscious decision to sustain low-frequency, low-severity risks. E.g. in warehouses, leakage from the automatic water sprinkler system is a low-frequency, low-severity risk that can be retained.

Risk Transfer is the act of transferring the risk to others – e.g. by buying insurance, whereby losses suffered are compensated by insurance companies.

Before purchasing insurance, organisations must identify operational risks and assess their impact, causes and potential consequences. They must then practice Risk Avoidance, Risk Reduction, Risk Financing and Risk Retention, so that the risk to be transferred (and thus the premium to be paid) will be minimised.

Risk Management is the bread-and-butter work of insurance underwriting. Risk Management teams analyse the risk involved and the quality of the operations of each account. Risk Managers focus on a site’s features and conduct reviews of systems and procedures. They benchmark the client’s operations against industry best practices. Risk Management helps underwriters identify good risks; avoid high-loss-potential accounts; identify loss-control/risk-improvement areas to develop accounts; and advise clients on ways to achieve their objectives.

SMEs are the backbone of our economy, and their strength and success drives employment and economic growth. Identifying and mitigating risks through Risk Management is the only way to guarantee business continuity in the long run. For their part, insurance companies can help SMEs by offering proactive risk management and claims handling, to achieve common objectives like identifying risks, minimising exposure and liabilities, and avoiding losses in partnership.