By John Pryor
Anyone who follows local, state and national news these days must have the same reaction I do — news is dominated by two major topics: politics and risk management.
It’s easy to identify political news; however, some risk management stories can be more nuanced while others jump out at you in unmistakable terms.
Every business owner needs to be sensitive to all such risks as each become increasingly important to the survival of their business itself.
A few examples:
The horrific flooding of the Missouri River in Nebraska and adjacent states shows business property devastated by rising waters with not only loss of buildings, equipment and inventory, but also loss of income for the duration of the flooding and beyond.
All-too-frequent news stories describe diversion of cash (or other property) from a business to an employee — always a “trusted” employee.
Then follow all the seemingly routine rounds of business fires, truck and auto accidents, construction injuries, burglaries and robberies, cyber-crime plus lawsuits — valid or frivolous.
Do you sense that your business is vulnerable to most, if not all, of these incidents and events?
In Kern County, most (but not all) businesses are not susceptible to flood damage. Yet all here are exposed to a severe earthquake — when the “next big one” ultimately arrives, as it surely shall. According to our scientific community, we’re long overdue. The last major event wasn’t in 1952. It was in 1987 on the nearby San Andreas fault. It will be devastating to all!
That’s a rather lengthy problem definition. Of more importance to us is the solution, through traditional risk management, of course.
It’s a matter of working through the various risk management processes and creating a system within your business to mitigate, if not eliminate, the multitude of risks every business confronts.
Here are risk management’s basic elements:
• Risk identification and measurement
• Risk control
• Risk finance
Risk identification and measurement, as the title implies, includes the following: Calculating costs you will incur to rebuild and reconstruct each of your buildings. The same for your equipment and inventory.
Other direct costs of personal property also need to be identified and valued, e.g., mobile equipment, signs, property in storage at another location, cash on hand, customers’ property in your care, custody, or control, computer hardware, supply chain risks, etc.
Any business also has indirect costs, such as loss of revenue, rental income, older buildings needing code upgrades, etc.
Liability risks are usually considered “unlimited” with special damages supplemented by less calculable general damages for pain, suffering, etc.
Risk Control includes, but is not limited to:
• Fire prevention
• Driver training
Risk finance is complex and includes:
• Risk assumption in which you opt to bear a particular risk (or portion of a risk through deductibles).
• Risk transfer by contract through hold harmless and indemnification provisions in contracts.
• Commercial insurance through your broker.
This brief overview is merely the tip of the iceberg, as each element requires in-depth thought and planning, not to mention key decisions for the future of your business.
The overall goal is to lower your total cost of risk (TCOR), a calculation that includes more than mere insurance premiums. It is worth tracking and charting over several years. It includes these costs:
• Deductibles and self-insured retentions
• Fire and cyber-crime prevention
• Legal defense costs for liability risks not covered by insurance
• Legal fees for drafting risk transfer clauses in contracts
• Commercial insurance premiums
Each of these complex elements of risk management can be more readily understood and implemented if you have, as a reference, my book entitled Quality Risk Management Fieldbook.
It couples both risk management and quality management (Lean Six Sigma) disciplines and best practices — hence, the word “quality” in its title.
Its 281 pages are full of data in great specificity, plus lots of worksheets, checklists, process maps and other graphics to help you walk through risk management processes effectively, well beyond your purchase of insurance. It’s endorsed by two California small business organizations as well as California and national insurance broker organizations.
It’s available through amazon.com, Russo’s, and the publisher: International Risk Management Institute in Dallas (www.irmi.com)
Print copies are available from each of these sources; however, IRMI also offers a digital copy for a very low monthly fee for the time you need this reference to work toward the two major goals of risk management: A lower total cost of risk and a quiet night’s sleep.
With sound risk management, you can enjoy both!
John Pryor, CPCU, ARM, AAI, AIS is a risk management consultant for CSU Bakersfield’s Small Business Development Center. For counsel without fee through the SBDC, go to www.csub.edu/sbdc and click on “Get Started” to register.