RISK Management: A Business Fundamental.

If you think money management is all it takes to keep your ship afloat, consider the Titanic. After the first ocean liner was built about 50 years prior to the Titanic's construction, safety precautions were chipped away one by one in the name of competition. According to Walter Lord, author of A Night to Remember and The Night Lives On, the perfectly constructed ship was no longer the goal; it was the ship that made the most money.

It took just one disaster to wipe out the White Star line, which was never able to recover the loss of the vessel and the resultant settlements. The nitty-gritty is that managing risks is as imperative as money management.

"Successful businesses add value--value to employees, value to customers, value to the bottom line. Good risk management is about enabling you to add to those values," said Randy Pugh, president and CEO of Willis of Alaska Inc. in Anchorage, who cited this as his favorite quote regarding risk management.

Managing risk means taking a broad view of what constitutes a risk, beyond the parameters of the conventional insurance marketplace. "Risk management has little or nothing to do with insurance, said Richard Osgood of Ribelin Lowell & Co. in Anchorage. "Insurance is just one of the tools."

Furthermore, risk management is more than identifying and eliminating risks to assure conformance. In fact, according to experts at the international firm of Willis, simply taking a traditional approach to risk control and claims management based on inspections and legislative compliance can fail to meet all business needs.

"Loss control helps prevent losses up front," Osgood agreed. "And you can cut costs with a loss control plan, but that's only part. Risk management even means considering what you are going to do with excess cash."

Effective risk management includes ways a business can improve performance. Willis professionals explain that taking a strategic view of risk is to view it in relation to return--the upshot being adequate protection and a healthier bottom line.

A risk manager is the person responsible for managing company activities that affect risks of loss. Initially, "loss" pertained to accidental loss. However, the scope of risk managers' activities today should include financial losses from many nonaccidental causes, such as currency fluctuations, market changes, pollution cleanup and much more.

Risk management encompasses many fields. A professional background of any type helps, but essential criterion is managerial ability. "A risk manager is a jack of all trades, master of none," said Lori Wing, senior vice president at Brady & Co. in Anchorage. "A risk manager's function is to look at all an organization does, from buying a car to hiring employees."

The risk manager's duties include identifying and measuring all exposures to loss. Consequently, he or she must know everything happening or about to happen in the company. An imaginative, exploring mind and the ability to communicate well with others is key.

The first step in the risk management process is identifying risk. After all, experts point out that if you don't recognize a risk, you can't treat it. Risks lurk in shadowy places, and chances are it takes a pro to sniff them out.

Today's risk manager identifies risks not only for insurance, but also for loss prevention. According to Wing, one aim of risk management is to help reduce the total cost of risk, instead of simply transferring it. This includes measuring the total cost of risk, setting targets for reduction and monitoring progress. For example, knowing back injuries comprise 60 percent of compensation losses can help determine the appropriateness of loss prevention expenditures. Being aware of the number of fires caused by cutting and welding operations and the amount of money lost as a result will reveal the extent of loss.

Risk managers need to be fully submersed in an organization and kept abreast of changes and developments that can create additional risks through new exposures via orientation, interviews, inspections, flow charts, loss reports, internal documents, checklists and financial statements. Once risks are identified and measured, Osgood suggests the business ask itself if it is capable of handling the loss.

According to Wing, risk managers try to break down areas of risk, which primarily are property, liability, financial and employees-the latter often an or ganization's largest exposure. Property risks embody buildings and contents, boiler and machinery, aircraft, watercraft, ocean cargo, goods in transit and crime-the most significant of which is employee dishonesty. Liability risks include general liability, products, automobile liability, professional liability, contracts and specialty fields. Measuring maximum loss potential from liability exposures is difficult because it represents the largest judgment that could be rendered against an organization.

The new hot topic in the insurance business is coverage for things such as sexual harassment, job discrimination, wrongful termination and so on, according to Pugh. "The coverage is important because of legal fees," he said. "In some states, legal bills can average $300,000 per case. We've had some big ones in Alaska, too."

Experts recommend background checks. "What better way to reduce risk," Osgood said, "than to try and check out an individual by obtaining police records, driving records and speaking with past employers before making that person an employee?"

Job applicants at Willis take IQ and personality tests. The firm also checks references, interviews past employers and confers with candidates in person. Background checks for the State of Alaska are done by the hiring agency, said division of risk management Director Brad Thompson. Positions carry different levels of requirements. Someone applying for a post as a state trooper, for example, will undergo an extensive background examination.

Risk identification and measurement are primary functions in an organization large enough to have a full-time risk manager. But what about smaller companies?

Successful risk management can be in-house or contracted out to a broker or consultant; however, all decision-making functions must be in-house. Every organization has a risk manager. In a large corporation, that person is likely to be a salaried professional. In a small company, the risk manager might be the president or managing partner. In a mid-sized business, the risk manager could be the person on the level of a chief financial officer.

In deciding when to staff and when to contract, consider the following: An on-staff risk manager is closer to operations; however, management has greater flexibility with contractors. Employees must have benefits and be kept onboard even in lean times, whereas contractors' work can be expanded or contracted as demands change. Brokers and consultants have experience with a variety of clients, allowing for a broader perspective; in-house departments can become empirical, ingrown, and thus inefficient. On the other hand, some firms have information that they might not want divulged to outsiders.

The degree of an independent risk manager's involvement depends on what business owners or board of directors want. "In the end," Wing said, "they take the heat."

A risk manager's function goes beyond identifying and assessing specific problems. It's necessary to broaden horizons beyond the traditional insurance solution to develop strategies that keep a business ahead of the game. Wing offered the fob lowing illustration: Say you own a catering firm and a group becomes ill from food you've prepared. Likely you have insurance that will cover the resulting medical bills. You may even have coverage for any down time your firm may suffer. But do you have a plan to recover your reputation?

Risk management involves planning for the unexpected. To be prepared for a crisis, plans have to be developed, continually tested and refined. Areas that can stimulate a crisis include bomb threats, environmental hazards, contractual disputes, acquisition/merger, employee injury or fatality and violence in the workplace. For instance, are you aware that according to risk management professionals, murder is now the third leading cause of death at work? Added to concerns for human life and worker safety is that of liability. Negligence can be charged if an organization did not take all reasonable precautions--which emphasizes the importance of following proper hiring and investigating techniques, recognizing warning signs of impending violence and implementing means to prevent and control violent actions of employees and outsiders.

Today, more and more businesses are expanding internationally, opening a whole new can of exposures, a few of which are political risks, kidnapping, extortion and war. Local laws and customs, varying rates of inflation, currency fluctuations and many other factors mean global efforts require multinational teamwork Larger brokerage firms have a worldwide presence, which lets them integrate an international risk management program.

The business world is changing at an accelerating rate. Corporate downsizing, re-engineering and the rapid advance of computers and advanced technology mean giant steps in the risk manager's need for knowledge. The World Wide Web has opened up the door to anew range of exposures, especially for financial institutions and organizations using the Internet for trading information. "Some are exposures we have no answers to yet," said Pugh.

A new buzzword in the industry is enterprise risk, according to Sherry Jones, Arctic Slope Regional Corp.'s risk manager and president of the Alaska chapter of Risk Insurance Management Society. Literature supplied by Willis states that the financial press has described enterprise risk as a paradigm shift in the risk management process. Enterprise risk isn't about protecting assets; it's about a strategic process to protect the bottom line. It embraces performance in its totality and can include competitive advertising, better corporate governance, reduced earnings volatility, improved capital allocation processes and a better product to clients.

"The world's changing," Jones said. "How we do our job continually evolves."

Companies that proactively embrace risk management should benefit from financial rewards beyond the cost of consultancy. But will they realize a drop in insurance premiums? "In the long run, yes," Osgood said. "The right plan will lower losses and make you more attractive as a risk--especially when the insurance market is tight."

Risk Management and You

How does your in-house risk management measure up?

The following questions are by no means comprehensive, but should help give you some idea of the magnitude of the risk management process.

Identification, assessment and treatment of corporate risk: Do you have a list of all real property? Can you determine the insurable interest at each location? Do you know the replacement or actual cash value at each location? Are you familiar with demolition and replacement of damaged property laws? Do you maintain an inventory of all owned or leased personal property? Have you taken into consideration natural, financial, economic and mechanical perils? Are you aware of indirect risks, such of loss of earnings due to business interruption, product recall, power or utility outage, among others? Are bonding requirements met? Are there key personnel whose loss would jeopardize profits? Can you measure liability risks by premise, product, employee benefits, personal injury and more? Do you have a disaster/crisis management plan in place?

Program design: Is appropriate use being made of self-insurance? Are limits of liability adequate? Are you consolidating coverage whenever possible to improve efficiency, achieve some economies of scale and possibly improve coverage terms and conditions? Have your insurance policy terms and conditions been tailored to the extent possible to cover identified exposures?

Cost effectiveness of program: Do you know your cost of risk? Cost of risk is the sum of insurance premiums, self-insured losses and administrative costs compared against some benchmark unit, such as per $100 of sales.

Communication within the organization: Can you break down your loss experience for the last five years? Can you break it out by department? Is there an area where frequency of claims seems excessive? Is it possible that some retraining can help solve the problem? Can you efficiently and effectively retrieve and manage information?