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Risk management in the nonprofit sector.

The complexity and diversity of nonprofit organizations is often underestimated. Professionals from the corporate sector think of nonprofit activity as volunteering to coach an after-school sports program, or being a member of the neighborhood association or a nonprofit board. Such experience with nonprofit organizations provides a sampling of what these entities do, but the range of resources and risk is vast. With every institution unique--based on size, services provided and the clientele served--it is difficult to make any sweeping statements about risk and risk management when it comes to nonprofits.

Nonprofit Primer

In 1998, nearly 110 million Americans--more than 55 percent of the total U.S. adult population--volunteered their time and services to nonprofit organizations. The same year there were 27.7 million organizations in the United States, of which approximately 1.6 million were tax-exempt nonprofits recognized by the Internal Revenue Service. Of that number, 734,000 were charitable tax-exempt nonprofits, also known as 501(c)(3) entities, which were eligible to solicit and receive tax-deductible donations, and 354,000 were religious congregations.

The activities and programs in which nonprofits are involved have never been more complex. Many services that fall squarely on the shoulders of nonprofits across the country were at one time the responsibility of government entities. Such efforts as work-release programs for recently paroled offenders, welfare-to-work training, employment programs for single mothers, drug treatment and mental health services, safe and decent housing construction for poor families, and teenage pregnancy prevention are increasingly handled by community-based nonprofits. Nonprofits are tackling the most difficult social and economic issues facing the United States.

Risk, Risk Management and Nonprofits

Most nonprofits are experienced risk takers. They recognize that without taking bold risks they have no hope of reaching hard-to-serve client populations, recruiting armies of volunteers to deliver services, or raising enough money to meet operating expenses. Nonprofits welcome the challenges associated with meeting compelling community needs. Though risk taking is familiar to individual nonprofits, the discipline of risk management is, in many respects, still in its infancy in the nonprofit sector as a whole.

The ranks have grown, however, and the number of individuals who acknowledge today that they serve as their nonprofit's "risk manager" has increased many times over. There are still comparatively few risk managers, though, when compared to the more familiar finance directors, directors of administration and directors of volunteers.

Risk management in the nonprofit sector is complicated by a number of issues, including the magnitude of uninsurable risks facing a typical organization. Nonprofits live on the edge and are frequently vulnerable. The source of this vulnerability lies in a wide range of perils, including:

* Allegations that an organization is working outside of its defined mission or spending charitable assets irresponsibly or in a fashion contrary to the intent of donors.

* Pressure from funders to recognize their donations in a way that costs money and time. Or worse, hidden strings attached to major gifts that are not evident at the time the donation was deposited.

* Discontent on the part of the board due to personal differences or personal agendas.

* Balancing the challenge of obtaining objective advice from truly independent advisors with the difficulty of rejecting the recommendation of a board member recruited for his or her professional contacts.

* Expectations by nonprofit employees that tax-exempt organizations should treat them with the compassion and caring afforded to clients.

Challenges and Opportunities

As is the case with for-profit organizations, the fortune of the nonprofit sector is tied inextricably to the ebb and flow of the stock market, the overall economy and consumer trends. When people respond to economic conditions by purchasing fewer consumer goods, they also tend to make fewer charitable donations. Donors facing a national crisis may direct their charitable offerings to one or two prominent disaster-relief organizations in lieu of other organizations that they have supported in the past.

At the beginning of the fourth quarter of 2001, several major national nonprofits acknowledged the need to freeze spending or downsize workforces in response to declining donations. All nonprofit revenue streams--investment earnings, charitable donations, corporate support and product sales--were affected by the economic conditions. This situation continued through the first quarter of 2002 when hopes of an early upswing in the economy did not materialize.

During times when resources are constrained and an organization's future is uncertain, the value of risk management is magnified. Yet when the pressure is on to respond to the present problems, devoting time to forecasting future risks and taking steps to mitigate them may seem out of reach.

Changes at Nonprofits

So what is changing in risk management for nonprofits in the United States? To get a sense of the developments, RM contacted the risk managers of a handful of prominent organizations--the American National Red Cross, Boy Scouts of America, Girl Scouts of the USA, The Salvation Army and the United States Olympic Committee--and posed a series of questions about risk and risk management in the nonprofit sector and their organizations specifically.

The structures of risk management activity in the organizations discussed in this article vary considerably. Some national organizations centralize insurance program management and risk management activities, e.g., purchasing coverage for affiliates (local chapters or councils). Others provide leadership in different ways, such as supporting the development of a sponsored insurance program in which affiliates participate, or disseminating recommended risk management policies without requiring adherence. The structure depends on the degree of autonomy local affiliates enjoy coupled with the organization's historical approach to the risk management function.

The Risk Managers

Samuel Bennett, Risk Manager, The Salvation Army (Bennett is one of four risk managers employed by The Salvation Army. He serves the Northeast Region.)

Richard Berman, Director, Risk and Insurance, Girl Scouts of the USA

Debra Griffith, Director of Risk Management and Insurance, Boy Scouts of America

David Mair, Director, Risk Management and Purchasing, United States Olympic Committee

Judith Nolan, Senior Director, Risk Management Division, American National Red Cross

RM: How has the perception of the risk management function changed for nonprofits over the past several years?

Berman: The gap between the for-profit and nonprofit worlds has been narrowing. Everyone is fair game for litigation, so risk management has become increasingly important.

Mair: Executive management in nonprofits has developed an increased awareness of the importance of risk management over the past several years. That awareness does not, however, seem to have translated into greater engagement of risk management internal functions, except in large organizations. Resource limitations, both human and financial, still cause mid- and small-sized organizations to remain insurance and broker focused.

Nolan: For the Red Cross, the change has taken place over a long period as our units have become more aware of the importance of risk management to their operations. Staff in the risk management division work closely with chapters, blood regions and other parts of the organization to help them assess risks, implement loss control programs and build an awareness of the cost of risk to the organization.

Bennett: For the larger nonprofits, I see little change in the risk management function; they were probably doing most things already. But the smaller nonprofits have probably struggled with getting their arms around this risk management beast. I believe more and more nonprofits are adding a risk management function to someone's job description, but without actually funding the position. Those saddled with the responsibilities are starving for education in the field.

RM: What new questions are your affiliates asking about the safety of their organizations and their clients?

Griffith: Top management has embraced disaster recovery and business continuation, and the time line for completion of our enterprisewide plan was moved up.

Bennett: We enjoy the benefit of a captive audience--the risk management department is their only source for coverage and related products. We also have the advantage of being able to spread risk--thousands of locations doing the same thing. During and following September 11, we were very pleased to see operating units put on their safety hats--checking on background of volunteers, drivers, temporary housing.

RM: What new security measures have you put in place or recommended in the last year? Which of these were added post-September 11?

Berman: Since last fall, we have recommended that all Girl Scout councils have disaster plans and business recovery plans written, distributed and up-to-date.

Bennett: One important safety issue that developed during the past year was the anthrax scare and how Salvation Army locations prepare their own mailrooms. A clear loss-avoidance directive was shared nationwide.

RM: How has your insurance coverage changed in the past year and what changes are you anticipating for the year ahead?

Bennett: Our insurance providers have demanded higher retentions for our P&C (property/casualty) program, offered lower limits for excess liability and added a terrorism exclusion.

Berman: Umbrella liability has increased dramatically for the national organization and to a lesser degree for our sponsored council umbrella program.

Nolan: Since our coverage period runs from July to June, we have only been dealing with some exclusions to existing coverages. These include our ocean marine coverage and nonowned aircraft. In both cases, premiums increased and we have less coverage now than we had before the September 11 events. Looking ahead, it is expected that we will see significant increases in our property premiums, as well as our excess program.

Griffith: Our professional liability policies were renewed January first. After fifteen years with the incumbent carrier, we made a change so that we could maintain the same terms and conditions with a minimal deductible and premium increase. March renewals are currently in negotiation. Because we self-fund a large portion of our general liability program and have sustained a stable loss experience, premium increases were minimal for the fronting and lower umbrella layers. We are still getting quotes for the upper umbrella layers. I argue that true underwriting should place greater emphasis on BSA's specific loss history as opposed to the industry as a whole, but no matter what the underwriters preach, they are underwriting in reaction to current events and reinsurance constraints.

Mair: Generally, we are preparing for a hardened market, exploring increased use of our captive insurance company, and preparing for coverage restrictions related to 9/11 fallout. It has become a reactive market in which the underwriters who have never seen a hard market are responding with a single approach, rather than engaging a more comprehensive evaluation of a particular risk. It's going to be a harsh market in the short term.

RM: What new risk financing strategies have you adopted?

Nolan: We will be looking at increasing our self-insured retentions and exploring basket aggregates. Since underwriters are not willing to discuss renewals at this time, we will be working on our strategy for addressing these issues soon so we are as prepared as we can be for the upcoming renewal.

Bennett: We had already set in motion the formation of a retention pool for our property exposures following the January 2001 renewal--the events of September 11 made us move much quicker with the process, which was put into place as of January 1, 2002. It was probably not that innovative, but necessity is the mother of invention when you have to cover thousands of properties worth billions of dollars, and it made insurance carriers sharpen their pencils when "self insurance" was mentioned.

RM: How do you think risk management will be viewed by nonprofits in the year ahead?

Griffith: Getting more attention, especially in regards to disaster recovery and business continuation.

Nolan: I believe that for the smaller nonprofit, it will be harder to ensure that risk management issues are addressed, especially if fundraising dollars dry up due to the large outpouring of donations for the September 11 victims' families.

Bennett: The initial thrust will be finance related and then loss prevention. The risk management function now has a higher profile. Its worth is now being recognized and appreciated by the line managers--they want to be assured of protection for their vehicles, facilities and personnel.

Mair: Because, unfortunately, nonprofit organizations respond more rapidly to crisis or the perception of crisis, more than by other growth-identification motivators, the events of 9/11 will increase risk management's visibility. The convergence of that crisis combined with a hardened insurance market creates significant opportunity for that visibility to be translated by many nonprofits into implementation of a risk management program that can make a difference in the life of the organization.

RM: We know that the number of full-time professionals serving as risk managers in nonprofits is small compared to the business and public sectors, but several industry publications have predicted that the demand for professional risk managers is increasing. What about the nonprofit sector?

Berman: The demand will probably increase somewhat as realization of the need for good risk management policy and practice is being made more aware for every organization.

Nolan: I don't think this will change quickly or easily. I think groups like the Nonprofit Risk Management Center need to continue to educate nonprofits on the need to assign risk management responsibilities to staff and to provide the necessary resources, showing them the benefits of such efforts, both in terms of dollars saved and the potential impact on public relations.

Mair: While there is a growth pattern in some industry sectors for risk managers, I don't see a dynamic increase taking place in nonprofit organizations. This will largely be related to the size of the organization and available resources.

Bennett: The larger nonprofits can't do without a full time professional risk manager--they are critical to the success of the organization. The smaller nonprofits have a much tougher road--they depend upon the advice of insurance brokers and perhaps volunteers serving on their boards. Joining an association of similar businesses would allow them to access the risk management field's education and purchasing power.

Melanie L. Herman is executive director of the Nonprofit Risk Management Center.

Melanie L. Herman ("Risk Management in the Nonprofit Sector," p. 26) is executive director of the Washington, D.C.-based Nonprofit Risk Management Center, a national nonprofit that provides technical assistance and resources on risk management to nonprofits. She is also a member of RM's editorial advisory council. (
COPYRIGHT 2002 Risk Management Society Publishing, Inc.
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Comment:Risk management in the nonprofit sector.
Author:Herman, Melanie L.
Publication:Risk Management
Geographic Code:1USA
Date:Jun 1, 2002
Previous Article:Breaking through the middle management ceiling.
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