I’ve been helping the executive team of a middle market enterprise consider its risk management options during a period of change and uncertainty.
This privately held company enjoys the benefits of long-term employees, loyal customers and an industry-leading brand. However, after several years of rapid growth fueled by long-term customer contracts, technical innovation and high quality customer service, it has outgrown its former risk management model and needs to develop new ways of identifying, understanding, managing and insuring its risks.
Over the course of our conversations, it’s become clear that the primary risk management challenge this company has is developing leadership consensus for a fresh risk management strategy to right-size the safety, health and benefits, and corporate insurance portfolio. These may seem obvious to the professional risk manager, but are not necessarily easily agreed by a leadership team focused on maintaining day-to-day operations in a constrained financial environment.
We've noted these key concerns:
- Lack of acceptable business interruption and related time-element coverage. To save costs, the previous risk manager elected to decline business interruption coverage. Following a more than $1 million property and business onterruption loss, the company sees things differently today, yet is still focused on purchasing a low deductible (and higher cost) insurance option. We coached the executive team to consider a higher deductible, to save premium cost while still protecting the organization against serious events with larger dollar impact.
- Inadequate management liability coverage. As a small-to-medium private company, the board of directors avoided purchasing directors and officers coverage based on the belief that a claim or suit would be highly unlikely. Recently, basic coverage was purchased for a low limit, incurring a minimum premium; however, a higher limit is available from the incumbent carrier for little or no additional cost. For reasons I can’t discuss here, we recommended a broader coverage form and higher limits for a similar premium cost.
- Benefits costs far beyond average for the industry, size and geography of this company. As a long-term company with loyal employees and customers, this organization has placed a premium (literally) on its ability to maintain health and benefits at a level far exceeding what is customary and competitive for its industry and geography. Monthly employee contributions for healthcare are less than the cost of dinner for two at the local grill & bistro. We recommended the company right-size its benefits offering — still maintaining best-in-class coverage for its industry and geography, while accepting cost adjustments that are fair to employees and support the company’s financial and operating objectives as well as its longer-term health.
These examples highlight basic risk management principles of understanding and managing risk within an organization’s risk profile and financial wherewithal. In each case, the company’s risk management strategy hasn’t caught up with its size and competitive position. Left unchecked, the current situation is diluting the company’s value. Recent events have highlighted the need for adjustment, as both coverage and cost have contributed to the company’s inability to maintain current levels of employment with healthy cash flow and profitability.
A more strategic approach to risk management questions (coverage, cost, structure) can both enhance the organization’s protection against extreme events — protecting assets, employees, cash flow and profits — while transferring risk in reasonable and cost-effective ways. The lessons of this example are the same for both smaller and larger organizations; sometimes doing things the way we’ve always done them doesn’t make sense when the business profile and/or business conditions change. This story also is about listening to skilled and experienced advisors as well as being willing to make tough decisions at the right time and for the right reasons — a fundamental skill underlying good risk management.
Laurie Champion is managing director and chief operating officer at Aon Risk Solutions. Opinions expressed in this article are her own.