When growing a business, you face a number of potential risks that can threaten your business in a number of ways. The loss of assets, income, liability to others, financial liabilities… among others.
Risk management is the process utilized to control and limit loss. That process includes identifying, analyzing, and mitigating risk. In general, there are four primary ways or a combination thereof, that is used to treat and control a risk: To Avoid the risk (stop doing the risky activity or dispose of the asset) To Reduce the risk (limit risky activity and/or take proactive actions to limit risk) To Transfer the risk (via Insurance or Contractual Agreement) To Retain the risk (in-whole or in-part)
In the process of risk analysis, most risks can be assigned to one of four categories based on the frequency of losses and the potential severity of potential losses. For each category, there is a standard risk management treatment typically utilized to mitigate the risk:
Low Risk + Low Severity = Retain the risk Low Risk + High Severity = Transfer the risk (to an insurance company) High Risk + Low Severity = Reduce the risk (or transfer) High Risk + High Severity = Avoid the risk
Most aviation exposures fall into the Low Risk, High Severity category, so aircraft owners typically address their aviation risks by transferring the bulk of the potential (pure) financial loss to an insurance company by purchasing an insurance policy. The insurance policy is a legal contract set to indemnify you in the event of a direct loss. To indemnify (indemnification) is to restore the insured to the condition they were in prior to the loss. That means that an insured is not meant to benefit from a loss, but to be brought to the status they would have been had the loss not occurred.
Risk management is a simple process in nature but can be much more involved and treated in more complex ways as operations get larger and more complex. However, the majority of aircraft owners and operators will find this concise information will provide a general understanding of their benefit.
Keep your business flying high by implementing these basic risk management techniques. Should you have a sophisticated business, be sure to partner with strong trusted advisors including an attorney, CPA, knowledgable insurance broker, and perhaps a Risk Manager, or financial risk manager.
This is an expert from the book Aircraft Insurance Fundamentals: A Concise Guide for Aircraft Owners and Operators by Timothy K Bonnell Jr.