Public-Sector RMs Face Unique Challenge

In light of headline-grabbing global public health challenges, risk managers are once again in the spotlight–especially those in the public sector. Like their counterparts in private industry, public sector risk managers are charged with finding effective ways to identify and quantify exposures, as well as a means to mitigate and finance them.

As demonstrated by the H1N1 flu outbreak, for example, effective public sector risk management processes are proving essential to managing and containing the pandemic. Public health officials and agencies have led the way in coordinating the response and in helping to mitigate the risks to communities in the United States and overseas.

At the same time, risk managers working for public entities also must contend with a number of other factors that influence their risk management strategies–and, ultimately, their ability to manage risk effectively.

Of these, the most significant–and often the most difficult to quantify–is the need to protect the “public good” and ensure that public institutions retain the confidence of the citizens they serve.

Protecting the public good is a multifaceted and complex task that includes both tangible and intangible assets.

Among the unique challenges faced by public sector risk managers are the following:

o Property Exposures:

One area–the diversity and geographical concentration of public sector properties–is of critical importance in risk management, as it can have a tremendous impact on the safety and security of entire communities.

Companies in the private sector often specialize in a few lines of business, making the types of property they own and insure more homogeneous–and, ultimately, easier to manage from a risk perspective.

In the public sector, however, government-owned entities often have a much more diverse set of assets to manage–from bridges, tunnels and roads to parks, golf courses, zoos, airports and schools.

In addition, public properties are often more clustered than those owned by private corporations, creating the potential for losses to be concentrated in a relatively small geographic area. As a result, threats such as natural catastrophes can have a significant impact on the continuity of services provided to citizens.

For example, the impact of the physical damage to New Orleans caused by levee failures and subsequent flooding from Hurricane Katrina was more far-reaching than simply lost tax revenues from water-logged businesses.

Flooding also shut down hospitals and the critical care they provided, swept away roads that facilitated the movement of people and traffic around the city, and closed numerous schools and government buildings that provided citizens with many of the services needed for daily sustenance.

Ultimately, Hurricane Katrina compromised the ability of New Orleans to effectively function as a city.

Given the special role played by public assets in supporting the public good, and the high degree of decentralized decision-making in the public sector, it is critical for risk managers to enhance their communication with other departments to successfully evaluate assets and risks.

Public sector risk managers are sometimes unaware of changes within the community's portfolio of insured assets, such as the purchase of a new piece of property, especially if there is no protocol requiring disclosure. By creating an efficient network of sources within all departments and agencies of a public entity, public sector risk managers can help to fill in these gaps.

o Risk-Financing Constraints:

Corporations in the private sector are primarily focused on shareholder value. Businesses carefully calculate risks with a view to maximizing financial return.

In the public sector, however, the interest of taxpayers takes precedence, causing risk managers to make decisions to protect assets while assuring taxpayers that costs remain reasonable.

At the risk-financing stage, public sector risk managers face regulations and statutes that can restrain their options. Unlike their private sector counterparts, these limitations may require that public sector risk managers secure multiple bids when purchasing insurance coverage and make the results of these bids available to elected representatives, such as a city council.

Statutes can also restrict the types of insurance contracts risk managers are able to purchase. Risk managers of public entities are often limited to standard commercial insurance, which means they don't have access to more complex, yet sometimes less expensive, financing alternatives–such as captive insurance, catastrophe bonds or surplus-lines insurance.

The added risk that some of these alternatives carry also can make them off-limits for public sector risk managers, as they may be considered an inappropriate use of taxpayer money.

With limited insurance budgets, public sector risk managers must spend more time educating local decision-makers about a particular insurance product. They must convince these public representatives–both elected and appointed–of the insurance product's long-term benefits, even when public officials may want to settle for a more affordable short-term option.

On the contrary, risk managers in the private sector may only need to consult a few people–the vice president of finance or chief financial officer, for example–on these types of decisions that impact the risks to an organization's physical assets.

o Maintaining Public Trust:

To secure and protect the physical assets and property of a public sector organization, risk mitigation includes preserving the public trust. This area often relates to an entity's brand image, which is generally more challenging to achieve in the public sector.

A serious dorm fire at a local public university, for example, could have a profound impact on the public's confidence in the university as an institution, and its affiliated government body.

Additionally, whether a tourist attraction disappears, a public facility is damaged, or a pandemic raises concerns, the loss of visitors and tax dollars to an area will ultimately impact the quality of services provided by a public entity to its constituency–further diminishing quality of life and weakening public confidence.

One option involves mitigating the risk of excessive dependence on certain properties within a community. Public sector risk managers must set alternative plans to replace destroyed properties.

This is especially true for historic buildings, whose structures are often central to the survival of a small community as they attract tourism and provide sales tax revenue. Given the importance of these buildings to the community, public sector risk managers must decide ahead of time whether to rebuild a destroyed structure or replace it with another building that could provide equal or higher revenue.

In conclusion, considering the multitude of public entities that exist today, there is no one-size-fits-all approach to addressing risk management issues.

For public sector risk managers, successful strategies focus on knowing the types of exposures that pose unique risks to institutions or regions and developing a comprehensive plan that identifies and quantifies those risks.

In addition, good risk management means effectively communicating with all stakeholder groups so that they understand the challenges that risk managers face, as well as the most effective solutions.

For the private insurer working with public sector agencies or organizations, recognizing the unique challenges facing public sector risk managers is critical to helping design risk management strategies that meet their needs.

Establishing sound risk management practices requires time and effort, as well as familiarity with the particularities of the public sector, including the risks posed to property, the organization and the people it serves.

With the right programs in place, risk managers who can overcome the variety of challenges inherent to public entities will ultimately succeed in properly protecting and instilling confidence in the public good.

Mary Breighner is vice president of global practice education, public entities and health care with FM Global in Cincinnati, Ohio.