Many events lie ahead of us, some expected while others not. What will
you do today to ensure that your property risk management program including
the appropriate use of insurance is proper for your organization not only
for today but for the days ahead?
-
A month ago, economists confirmed the United States has been in recession
since December 2007 and that no end date can be accurately projected; we
will know it is over when it's over.
-
Unemployment continues to rise and may not decrease or even level off
until 2010.
-
Credit has somewhat returned but the financial services industry is extremely
cautious in granting it.
-
India suffered greatly a month ago as it was ravaged by terrorist acts
that threaten both its overall economic well being and its "back room" industry
for many U.S.-based organizations.
-
War continues in Iraq and Afghanistan, and oceangoing pirates seem to
rule the seas off the coast of Somalia.
-
Catastrophic storms will again be a concern to many U.S. citizens and
organizations as parts of the United States brace for the 2009 hurricane
season while other areas prepare for tornados and equally devastating natural
acts.
The one constant for many risk managers in 2009 will be the continuation
to limit their focus for property risk management (and unfortunately, likely
for all facets of their risk management practices) on the continued view of
their schedule of insurance as a risk management planning tool; a static list
of insurance policies that is based on prior expectations of risk of direct
damage and time element loss. Is this planning device adequate? No, and especially
not in times of great economic and global uncertainty.
"Would you tell me, please, which way I ought to go from here?" asked Alice.
"That depends a good deal on where you want to get to," said the Cat.
"I don't much care where …" said Alice.
"Then it doesn't matter which way you go," said the Cat.
~From Alice's Adventures in Wonderland by Lewis Carroll
What can we learn from Alice's adventures in Wonderland? She needs more than
a roadmap. She needs a plan; she needs a destination; she needs an objective.
How many risk management professionals challenge themselves to know what may
have changed or may change within their organization in the days, weeks, and
months ahead? As the Cat says to Alice, without a destination, she can take
any path from here and arrive somewhere. The unfortunate reality of following
any path as a risk manager is the destination or objective may not be appropriate
when viewed later, especially after an adverse loss event.
"One of these days is none of these days."
~H. G. Bohn
Procrastination undermines an individual's ability to seek timely satisfaction
of critical tasks and objectives and thus becomes an operational risk to the
risk management process itself. Mr. Bohn says succinctly putting off today for
tomorrow will probably mean that nothing will be done and no directional changes
will occur; status quo is a danger to all risk management professionals.
"There is only one thing about which I am certain, and this is that there
is very little about which one can be certain."
~W. Somerset Maugham
To paraphrase Mr. Maugham, we must remind ourselves that uncertainty is certain;
things happen—some good, some adverse. A recent television advertisement by
Nationwide Insurance says it all, "Life comes at you pretty fast." Seize the
moment today, not tomorrow, to understand your organization's exposures that
may exist today and how they may change by tomorrow. Do not rely on exposures
identified last year and simply rollover your risk management practices from
2008 into that for New Year 2009.
Many risk management professionals rely solely on their current schedule
of insurance, recent statement of values, and business income worksheet as risk
management planning tools for property exposures and use of insurance for possible
direct damage and time element loss. When one continually focuses on a policy
renewal date, it is possible that ongoing risk assessment will not be done,
especially when needed in times of uncertainty as we expect change in 2009 and
for the foreseeable future. How can risk prevention, risk reduction, and risk
transfer be effective if the underlying risk assumptions are not frequently
reviewed, understood, and tested? It cannot, unless one wants to rely on luck
alone, an inadequate and uncertain tool in the risk management professional's
toolbox.
Risk Management Resolutions for 2009
Nearly all U.S. industry is and will continue to be affected by the current
recession. This recession will create potential risks that may be new to many
risk management professionals. A key resolution for 2009 (actually an activity
that should never stop) is to determine what changes have occurred and may occur
later in the New Year that may create new and larger risks of loss to your organization.
This global view should not be just on direct damage and time element issues,
but across the whole spectrum of an organization, especially if an organization
is implementing an enterprise risk philosophy: risk is risk, and risk of loss
can occur from many sources, not just "insurable" risks.
Risk management encompasses many activities and is a job for more than one
person. A risk manager will manage risk only by leading, directing, soliciting,
and involving others first, and in doing so, will manage all risk activities.
This is especially true for large organizations with many locations and multiple
operations. Unemployment is the highest in many years. Certain parts of the
United States have higher employment than others. Thousands of jobs have been
terminated. It is possible that some jobs lost were held by individuals that
served the risk manager as his or her ad hoc eyes and ears within the organization.
Have these critical internal resources been lost? What happened to the keepers
of an organization's institutional history that may have more in-depth organizational
and operational knowledge than the risk manager? Are you as risk manager visible
enough to others in the organization to receive proactive notice of organizational
and operational changes that may affect the property risk management program?
Is your past network still intact? Do others in the organization know that you
are the go-to person for risk and insurance issues? If not, what can you do
to increase and sustain this needed visibility?
Events external to the organization may affect fixed assets and the potential
to generate gross income. Let's consider some events and how the risk management
professional may need to respond.
The organization expects a reduction in sales which
causes it to reduce inventories and consolidate facilities. -
Coverage limits for scheduled and unscheduled locations may be inadequate
as values are shifted from inactive locations to active ones. Location coverage
may be subject to a margin clause which provides a certain percentage greater
than reported value (such as 120 percent) but may not be sufficient if the
consolidation at any one location is greater than the margin allowed.
-
Certain goods may be liquidated, reducing insurable values. Inventory
values may need to be recalculated (actual cash instead of replacement cost)
that may result in decreased values.
-
Goods in transit may increase for any one vehicle as inventory is consolidated
from one location to another.
-
Consolidation of facilities may cause organizations to maintain vacant
locations until lease termination or sale of property. A vacant and/or unoccupied
location may invoke coverage restrictions for loss by vandalism and burst
pipes. Uninsured loss is not an effective use of self-insurance. Exposure
and policy language must be examined.
-
Coinsurance requirements must be reviewed to ensure that consolidated
locations still maintain the proper relationship of value at risk to limit
insured.
-
The probable maximum loss (PML) of a given location may increase from
additional insured direct damage and time element values. This change may
require the insurer to reduce its net line and rely on facultative reinsurance,
thereby increasing premium beyond that simply tied to increase in exposure
(total insurable value: TIV).
-
Physical damage exposure for road-going vehicles (private passenger and
trucks) will need to be reviewed. Large fleets are often self-insured for
physical damage (fire, theft, windstorm) since the thought is with many
exposure units and spread of risk, there is a limited catastrophe exposure
from one single event. Staff reductions may result in consolidated inventories
of vehicles. The risk manager will need to consider any change in exposure
that may lead to possible aggregation of values at risk and seek new risk
treatment.
Expected reduction in sales and operating income—considerations
for business income and extra expense. -
Manufacturing redundancy may be reduced, creating potential for bottlenecks
and longer downtimes from major loss events such as fire, windstorm, and
interruption of power.
-
Reductions in redundant operations may increase the possibility of a
longer period of interruption when operations can not be easily shifted
from damaged location to undamaged location. The risk manager will need
to evaluate the length of time to be insured, i.e., increase to 180 days
from 90 days. This same scenario may require the need for increased extra
expense coverage when the organization needs to operate as quickly and seamlessly
post-loss event as it had pre-loss event.
-
Reductions in workforce may require changes in amount of ordinary payroll,
whether to insure the exposure and duration of coverage if insured.
-
Workforce reductions may affect the effectiveness of existing disaster
and business resumption plans. Remaining staff may not be well versed in
post loss event recovery responsibilities and procedures. As a result, the
organization may be more vulnerable to lengthy interruption of loss event
than existed when fully staffed.
The organization makes changes in trading partners
as some go out of business; some have reduced operational capacity, while others
no longer satisfy credit standards. -
If the number of suppliers has been reduced, thus limiting redundancy
in incoming supplies or outgoing sales, then the risk manager will need
to reconsider the need for contingent time element—whether business income
or extra expense.
-
Change in world exposures (India) may require an organization to "in-source"
activities that previously had been "outsourced," thus creating new direct
damage and time element exposures.
-
Continued acts of piracy may lead to reduced efficiency in outgoing and
incoming shipments, which may in turn result in increased values being shipped
and delays in obtaining replacement materials for damaged or destroyed personal
property. This second scenario will need to be reviewed for both business
income and extra expense exposure and coverage.
Postponed capital expenditures. - Senior management concerns for reduced income may result in postponement
of certain planned capital expenditures. Loss control recommendations (such
as upgraded sprinkler systems, booster pumps, etc.) may be held back by
senior management until after the economic slowdown, as these expenses are
not seen as critical to expanding sales or improving profitability.
Conclusion
The risk management professional will need to take stock of risk and exposure
issues within his or her organization as the organization addresses the new
and increased pressures of the New Year. Times of difficulty are times that
can create great success and visibility for astute risk managers seen as solving
problems through planning and execution. One need not be an Alice or a procrastinator.
Some New Year resolutions are offered to risk managers as a starting off point
for planning property risk management practices for 2009 beyond simple use of
a schedule of insurance.
Resolution 1: Test your internal networks
and usual contacts used to learn about the organization. Internal coworker resources
for a risk manager include, but are not limited to, functions such as security,
facilities, finance, human resources, procurement, operations, sales, and senior
management. Identify other individuals in each department in case your primary
contact leaves. Create the means to have frequent contact with these individuals
and encourage all to reach out to you with any risk question or notice of an
upcoming change in operations.
Resolution 2: Use the New Year to relearn
the operations, activities, and exposures of the organization. Do not forget
past history, but focus on the challenges the organization expects to have in
the months ahead.
Resolution 3: Restructure the property
risk management program based on information gathered during Resolution 2. Rank
proposed changes on need and cost. Implement those changes that will have the
greatest economic value to the organization. Counsel senior management on proposed
changes, especially those that result in significant increased insurance expense.
Resolution 4: Communicate property risk
management issues (for that matter, all
risk management issues) to appropriate management. Include thoughts on possible
solutions as well. Discuss the need for ongoing loss control initiatives, especially
those that will require a capital expenditure. Provide management with a cost/benefit
analysis of why the expense should be incurred now instead of later.