Skills in risk

Every end is a new beginning. This has never been truer than in today’s fast paced world where everyone and everything is constantly being reinvented.

As I look at my career in the risk management field, I can see that risk management is an evolutionary process where people and companies become more aware of their risks and how to manage them profitably. This evolution can be seen as a continuum of stages from spectator to coach and moving along this path involves increasing awareness of the risks inherent in the operation, and how to manage them.

While the insurance industry provides a vital and indispensable resource to business, it must be coupled with an integrated risk management program to ensure “post-loss” survival.

There are three deadly risks that can destroy a business: Time, Market Share, and Image. Unless these are recognized early, their impact will be the greatest challenge the company will face and if not addressed before hand, their effect can be lethal.

The spectator: The first stage in the evolution

Spectators are new businesses, businesses that have built in redundancy, and businesses that have never had a loss and rely totally on insurance. All are unaware of the risk arena they operate in.

New businesses are preoccupied with the operational aspects of building the business. Management is concerned with only “pre-loss” goals like profitability or logistics and hasn’t become aware of the various post loss goals that must be addressed when a loss occurs.

Mary ran a word processing operation out of her home. It was extremely profitable and several customers became regulars and were recommending her. Last week the power surged and burned out some of the circuits in the computer. She had called the computer’s company and finally got a technician to look at the computer. Meanwhile several of her jobs were now late and customers were getting angry and losing confidence. Mary had never anticipated this. Mary was now struggling with survival issues (post-loss goal) rather then profitably and growth issues (pre-loss goals).

Companies used to build redundancies into inventories so that any interruption in operation would not affect sales. For example sales outlets might keep two-week inventory in stock. While this risk management technique was useful should a loss occur, it was costly. In today’s business environment the cash was more vital so as the business eliminated these redundancies its risks increased and unless it has contemplated the full impact of this move on the business, the stage is set for disaster.

Finally, businesses that have never had a loss and rely totally on insurance to manage their risk are positioned for a rude awakening. As Mary in the example above discovered, insurance is not the answer to all the risks a business faces. If power surges were anticipated in the original policy wording then the damage to the computer may be covered but what about down time, lost revenue, and damage to your reputation as a viable concern. After a loss the business may never recover if these critical risks were not identified and dealt with.

Insurance professionals working with business at this stage should try to make their customers aware of the fact that while insurance is essential it is not a remedy for all risks that the company will face. They can assist the operation in developing a minimal risk management program that will identify risks that are better managed through a risk control program.

At this stage, education is the most essential component in developing awareness of various risks that the operation faces. Education can occur through an industry network, newspaper and magazine articles and educational programs offered by professional organizations like the Risk and Insurance Management Society (RIMS) that have professionals working with risks.

When I first got involved in the area of risk management I found that my awareness developed exponentially through my interaction with industry peers and involvement with RIMS. As my awareness grew I began to evolve to a team player in the management of Coca-Cola’s risks.

The team player:

The second stage of evolution

Team players are companies that have become aware that the managing of risk needs their involvement and cannot be abdicated. While these companies vary in size, they all share the realization of the importance of planning out post-loss goals and setting out a strategy for how risks will be handled.

Risk management programs begin to develop that address risk financing, risk control and communication and the opportunities offered in each area. There is more team interaction between the broker, insurance provider and company representative that works to develop effective and profitable programs.

Often these businesses find that when they get more involved with the managing of their risks, the insurer is more open to exploring new risk financing options that will give them a better return on their insurance program.

Claims management is a critical financial concern that involves the company, the customer and the product. This is the critical satisfaction equation of any business. How the customer is handled is essential to the image that the company has worked hard to develop, and the management of its image is vital.

At a minimum the business should work closely with the insurance claims people to ensure the company message is continuous. In my experience with the Coca-Cola system in Canada the customer is king and getting on claims quickly and handling the outcome expeditiously was vital for success.

Again, by working with the insurer and claims personnel, the business finds it can reduce insurance costs, reduce claims cost and improve customer relations all by getting involved in managing the risk.

Risk control programs involve working with the insurer to find ways to eliminate or reduce the impact of losses on the business. As a team player, most companies will tend to think in very traditional solutions like sprinkler systems to reduce losses from fires or vehicle inspections to reduce liability losses. As well, the business expects a significant reduction in the insurance premium to cover any investment in these programs.

However, risk control programs do not always result in decreased insurance premiums due to spread of risk concept often used in setting premiums. Risk control programs can prevent or significantly reduce a loss and that can often mean the difference between survival and extinction for the business.

Communication programs usually are very minimal and involve simply reporting on the insurance premiums. It is vital that the risk control program, claims management as well as risk financing programs all be measured and reported on to all areas of business. The executive will seek a snap shot of how the program is working where the operations will want more bottom line details but it is essential to have “buy-in” from all levels of the business to make the programs effective.

Eventually the business realizes that the management of risks is ultimately their responsibility and taking the lead and setting the philosophy can capture significant financial rewards. The management of risks is as critical to an operation as the management of its finances, logistics, operations and sales. At this points the business becomes the coach or master of it’s destiny.

The coach or master:

The final stage in the evolution

As a coach the business now establishes a risk management policy setting out how it will handle the risk inherent in the operation and putting in place a program for continuous improvement in the ongoing review and management of risks. Many large national and international companies occupy this area as well as operations that have survived a significant loss that insurance could not alleviate.

Having assessed the risks inherent in the organization and developed innovative risk control and risk financing programs for the operation, the business now focuses on managing change. A manager or vice-president is now assigne d responsibility for monitoring the programs and ensuring their profitability and cost effectiveness as well as their adaptability to the changing operational, organization and regulatory or business environment.

The communication strategy involves annual reporting to the Board of directors as well as to the operational entities setting out the goals and opportunities captured by the risk management program.

Change is the only constant in today’s environment however every change brings new opportunities. As a business moves along the risk continuum from total unawareness of risks to managing the full range of risks it finds endless opportunities. Harnessing these opportunities is the million-dollar opportunity.

Businesses that have never had a loss and rely totally on insurance to manage their risk are positioned for a rude awakening.