John Pryor

John Pryor

Country western artist Kenny Rogers passed away recently and is mourned by many, especially here in “Nashville West,” as Bakersfield is often called.

Rogers was an effective risk manager at the poker table. He knew “when to hold ’em, when to fold ’em and when to walk away.” But how does anyone in business acquire this same knowledge regarding risks faced by their organization?

His lyrics referred to gambling. Many see insurance as gambling. However, there is a major difference.

In gambling, no risk is created until a bet is placed. In business, whether we hold ’em or fold ’em, risks are perpetually present and a severe threat to the financial solvency of any business.

The challenge is for us to know how to treat each risk — not solely through insurance but also through noninsurance solutions.

A risk management tool called the Prouty Matrix, named for its creator, is recommended. It is described in depth in my book, “Quality Risk Management Fieldbook,” available on Amazon and from the publisher, International Risk Management Institute in Dallas. In the limited space here, the following description nevertheless may be helpful.

Its purpose is to help business owners decide what risk management alternative actions should work best for them. These are the customary financial alternatives:

• Risk assumption: Total funding of any loss from internal financial resources.

• Noninsurance risk transfer: By written agreement, usually in the form of a “hold harmless” or “indemnification” provision.

• Insurance risk transfer: Commercial insurance.

• Combined risk assumption and commercial insurance in which a high deductible is used ($100,000 or higher) or formal self-insurance with a high, catastrophic “stop loss” ($500,000 or higher) reinsured by an “excess insurance carrier.”

• Total avoidance of the risk: By not building in a low-elevation flood zone or not engaging in a high-risk project or venture.

Each of these actions is typically coupled with multiple effective levels of risk control. For example:

• Fire prevention measures — fire suppression (automatic sprinkler) systems,

safety and driver training — to reduce employee injuries and deaths.

• Security measures — alarm systems, safes, internal accounting controls and

other risk reduction measures — to prevent liability claims of all kinds.

Each risk facing your business needs to be applied to the Prouty Matrix in terms of the probability of its frequency of occurrence and its maximum dollar amount of severity. Then you’ll have an indication of what appears to be the best action to take for each risk.

Not all risks are commercially insurable. The requisites of a commercially insurable risk are that the risk must be fortuitous (unexpected), measurable in terms of dollar loss, definite in time and place and not catastrophic.

This is the reason floods, terrorism, war, pandemics, etc. cannot be commercially insured. In many instances, the federal government (not constrained by these criteria) can do so in the public sector what commercial insurers cannot do in the private sector. Only the federal government can “print money” to avoid insolvency.

A new opportunity for Congress — although ignored so far — is business interruption reinsurance funded by the federal government. Virtually every business property insurance policy includes business interruption coverage. This coverage provides needed cashflow during any shutdown to enable business owners to meet payroll obligations and pay other expenses that necessarily continue even though all normal revenue-generating operations are shut

down.

Insurers are well positioned to calculate the dollar amount of a business interruption loss. They usually can even make advance payments to assure adequate cash flow for the business during its shutdown. With the federal government reimbursing insurers for their payments to businesses, this is a much better method than others proposed by Congress to help businesses survive the current pandemic.

One of my favorite stories is about a family owned manufacturer on the East Coast who experienced a total fire loss and, therefore, total shutdown of his operations. The owner was regarded as a hero by the media and especially by his employees because he unbelievably continued their salaries even though there was no work they could do in the wake of the fire. Insurance was not mentioned as the actual source of these payments — but that’s OK. Virtue is its own reward.

As has long been said, “You can’t insure against everything.” Therefore, this matrix tool should be helpful to you in deciding which risks should be insured and which risks can be assumed, transferred to others or totally avoided.

Then you should enjoy one of the many benefits of risk management — a quiet night’s sleep.

John Pryor, CPCU, ARM, is a risk management and general management consultant for CSU Bakersfield’s Small Business Development Center. For management counsel (without any fee), go to www.csub.edu/sbdc for full information.

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