I've been helping the executive team of a middle marketenterprise consider its risk management options during a period ofchange and uncertainty.

This privately held company enjoys the benefits of long-termemployees, loyal customers and an industry-leading brand. However,after several years of rapid growth fueled by long-term customercontracts, technical innovation and high quality customer service,it has outgrown its former risk management model and needs todevelop new ways of identifying, understanding, managing andinsuring its risks.

Over the course of our conversations, it's become clear that theprimary risk management challenge this company has is developingleadership consensus for a fresh risk management strategy toright-size the safety, health and benefits, and corporate insuranceportfolio. These may seem obvious to the professional risk manager,but are not necessarily easily agreed by a leadership team focusedon maintaining day-to-day operations in a constrained financialenvironment.

We've noted these key concerns:

• Lack of acceptable business interruption and relatedtime-element coverage. To save costs, the previous riskmanager elected to decline business interruption coverage.Following a more than $1 million property and business onterruptionloss, the company sees things differently today, yet is stillfocused on purchasing a low deductible (and higher cost) insuranceoption. We coached the executive team to consider a higherdeductible, to save premium cost while still protecting theorganization against serious events with larger dollar impact.
• Inadequate management liability coverage. As asmall-to-medium private company, the board of directors avoidedpurchasing directors and officers coverage based on the belief thata claim or suit would be highly unlikely. Recently, basic coveragewas purchased for a low limit, incurring a minimum premium;however, a higher limit is available from the incumbent carrier forlittle or no additional cost. For reasons I can't discuss here, werecommended a broader coverage form and higher limits for a similarpremium cost.
• Benefits costs far beyond average for the industry,size and geography of this company. As along-term company with loyal employees and customers, thisorganization has placed a premium (literally) on its ability tomaintain health and benefits at a level far exceeding what iscustomary and competitive for its industry and geography. Monthlyemployee contributions for healthcare are less than the cost ofdinner for two at the local grill & bistro. We recommended thecompany right-size its benefits offering — stillmaintaining best-in-class coverage for its industry and geography,while accepting cost adjustments that are fair to employees andsupport the company's financial and operating objectives as well asits longer-term health.

These examples highlight basic risk management principles ofunderstanding and managing risk within an organization's riskprofile and financial wherewithal. In each case, the company's riskmanagement strategy hasn't caught up with its size and competitiveposition. Left unchecked, the current situation is diluting thecompany's value. Recent events have highlighted the need foradjustment, as both coverage and cost have contributed to thecompany's inability to maintain current levels of employment withhealthy cash flow and profitability.

A more strategic approach to risk management questions(coverage, cost, structure) can both enhance the organization'sprotection against extreme events — protecting assets,employees, cash flow and profits — while transferring riskin reasonable and cost-effective ways. The lessons of this exampleare the same for both smaller and larger organizations; sometimesdoing things the way we've always done them doesn't make sense whenthe business profile and/or business conditions change. This storyalso is about listening to skilled and experienced advisors as wellas being willing to make tough decisions at the right time and forthe right reasons — a fundamental skill underlying goodrisk management.

Laurie Champion is managing director and chief operatingofficer at Aon Risk Solutions. Opinions expressedin this article are her own.