The Rising Costs (and Risks) of Working with Third Parties in 2022
June 28, 2022
According to a study conducted by the Insurance Information Institute in 2018, roughly 44% of small business owners have no insurance at all due to financial constraints. Four years later, as the economy readies itself for a recession, small businesses are under even greater financial pressure due to rising rates and inflated premiums, all of which has given them new reasons to cut costs, thereby amplifying their own risk and the risk of the enterprises with whom they do business.
Businesses can no longer “set it and forget it” when it comes to maintaining proper insurance – coverage that adequately prevented risk in more predictable times can now quickly become insufficient for many reasons. Examples of this might include updated insurance requirements to obtain a small business or commercial loan, or revised insurance requirements in a franchise disclosure document.
These days, coverage is more likely to become inadequate as small businesses that are worried about their bottom lines make the conscientious decision to let their policies lapse. Small businesses are shopping around for new coverage to figure out where they can trim costs so they can avoid spending too much on insurance they may never use. If a company can no longer afford higher premiums and larger deductibles, it’ll look for ways to get creative with reducing coverage limits, rolling back exclusions, and dropping endorsements so they can maintain proper coverage to continue operations, but it won’t be enough to stay fully protected.
“A common problem is not having business insurance at all. All it takes is a theft, fire, a long power outage or a customer slipping and falling and a small business owner can find themselves without the help they need.”
– Stephanie Bush, Head of Small Commercial and Personal Lines at The Hartford
No business owner likes to consider the worst-case scenario, but the real cost of cutting costs is getting hit with a million-dollar lawsuit in the event of a loss – even those generated by a third-party partner – and in this unpredictable world where we’re seeing many “unlikely” events occurring (often simultaneously), it’s become clear that 2020 wasn’t just an anomaly, but rather a pivot point into a new world for risk… and more specifically, third-party risk.
What Does Third-Party Risk Mean?
Third-party risk is the exposure a business has to losses (e.g. operational disruption, data breach, physical accident, etc.) generated by external organizations, such as those they have a partnership or an agreement to provide certain products or services. Losses can take many shapes and forms and can stem from any vendor, supplier, franchise, contractor, or other external partner in the business’ ecosystem.
Most businesses have a diverse network of third-party partners, each with their own unique value and subsequent risk profiles. Consider how many vendors a business contracts to stock shelves, clean facilities, streamline IT services, scale shipping logistics, and even refill the water coolers. All of these business relationships present opportunities for unwanted exposure to third-party risk.
The Importance of Third Party Risk Management
Third-party risk management is important because enterprises are outsourcing more critical business functions to vendors and other third parties than ever before. The global managed services market – which includes anything from supply chain management to marketing strategy to call center operations – is expected to reach $372.8B by 2027, and the IT outsourcing market is estimated to grow to $97.5B by 2024. Increased outsourcing means increased risk – especially when third parties outsource work to their own vendors.
Without third-party risk management techniques in place – like insurance verification and business credentialing – enterprises can be held liable for damages caused by their direct partners and even their partners’ partners.
How Evident Helps
Evident’s fully-digital, fully-automated insurance verification and integrated embedded insurance solution is making it easier for small businesses to obtain the exact right amount of coverage necessary to do business. With Evident, risk managers no longer have to manually review certificates of insurance (COIs) and instead, can automatically extract the data they need from a static document and decision on that data to determine whether they will contract a third party and for how long.