Running the risks: it pays to know your appetite for risk before calculating your insurance coverage.
Risk management is the process of identifying the risks that threaten your organization, then selecting the right techniques to mitigate the adverse effects of these potential losses. Mitigation comes in two general flavors: risk control and risk financing.
Risk control involves avoiding a dangerous activity, reducing the possibility of a liability-laden event occurring, or minimizing the financial consequences of its occurrence. Avoidance involves not undertaking an activity or event--such as not offering an Outward Bound-type team-building experience--whereas risk reduction or minimization might include reviewing contracts for indemnification and insurance provisions, backing up your electronic data off-site, or revising your employee handbook.
Risk financing refers to how the association will pay for its losses and what other parties might share the risks and costs. One method of risk financing is to transfer any adverse financial consequences of an activity or event to another party by an indemnification or hold-harmless agreement. The most common approach is to purchase commercial insurance, the method by which most associations tackle risk financing. While insurance premiums can become a significant part of your association's operating expenses, especially in this hard insurance market, organizations can manage these costs. For example, the rate of increase for insurance premiums is tied to your loss experience. This means that the risk management techniques you use to reduce the chance or size of loss will help you to monitor insurance costs. And this is significant given that the average rate increase peaked at 35 percent last summer; they have since fallen to around 12 percent.
The first step in controlling insurance costs is to consider the goals and objectives of your association's insurance program.
* Determine the risks that are the most important to insure against. With the insurance you purchase, are you attempting to achieve coverage for every possible insurable loss, or will you seek protection only for catastrophic events? Insurance is certainly available to cover every contingency--as long as you're willing to pay the price.
* Consider your financial pain threshold. How much can your association afford to pay in the event of a loss, either in the form of a deductible or an uninsured loss? One way to determine this is to evaluate your financial condition and perform a cost-benefit analysis for various types of insurance coverage and your level of retention or deductible. A policy with a large deductible may positively affect the premium, but it is a false savings if paying the deductible would place an extreme hardship on your association. Sometimes the decision can be made by simply answering the question: Can our association afford to buy meeting cancellation, travel accident, or errors and omissions insurance? If you can't afford it, what actions will you take to minimize the possibility of a significant loss? This is where risk management, designing steps to reduce the chance of a loss and its resulting adverse consequences, enters the picture.
Ready, set, buy
Once you have set your insurance goals, you must decide upon coverages and policy limits. If your association is risk averse, you will most likely keep deductibles low and purchase as much insurance as you can afford. If your association is more risk tolerant, you will have larger retentions and rely on insurance for the catastrophic losses, not for the more frequent losses that carry lower or acceptable costs. These decisions involve an analysis of your association's risk tolerance, the nature of its activities, its use of risk control techniques, and its financial condition.
Trends in today's market
Event cancellation. As insurance costs have increased, associations' buying habits have changed. One example of this is event or meeting cancellation insurance. Before September 2001, this coverage was relatively inexpensive, compared with the potential loss of income. Associations purchased it for all of their meetings, including those events for which cancellation would have a limited financial impact. As such, event cancellation insurers suffered enormous losses after September 11. The market went through tremendous turmoil; companies even stopped writing the coverage for a short time. When insurers returned, the rates had doubled, which led to more expensive event cancellation coverage and limited, if any, coverage for terrorism. The higher costs and restricted terms forced many associations to reevaluate the benefit of this insurance relative to its cost.
To mitigate this loss exposure, associations began using several techniques for risk control, revising cancellation provisions for members so that timetables matched facilities' deadlines. Many associations revised their decision criteria for canceling meetings, and all became more knowledgeable about effective force majeure clauses, which excuse a party from liability in the event of a natural disaster or other unforeseen event. Meeting planners now strive to minimize potential financial losses from canceled meetings by more closely monitoring unrecoverable costs and lost revenue from vendors and attendees.
Employee dishonesty. When evaluating your association's loss potential, do not overlook losses arising from employee theft. In its 2002 Report to the Nation, the Association of Certified Fraud Examiners, Austin, Texas, revealed that 6 percent of annual revenues are lost as a result of occupational fraud and abuse. Based on the U.S. gross domestic product, that amounts to approximately $600 billion, or $4,500 per employee. The average small-business fraud scheme costs $127,500 in losses, compared with $97,000 at larger organizations. Few nonprofit organizations can afford to absorb losses of that size.
The report also found that the typical fraud perpetrator is a first-time offender; only 7 percent of fraudsters in the study were known to have prior convictions for fraud-related offenses. According to one association executive (who chose to remain anonymous) who has weathered the ordeal of employee theft: "It is devastating emotionally and financially to have an employee steal from you. The recovery process is slow and involves reassessing all of your internal controls and enforcement mechanisms and learning to reasonably trust people again."
Employee dishonesty insurance is relatively inexpensive compared with the potential for loss. Most associations have some coverage (usually $25,000) under the package policy, and some have an added crime policy. Costs vary due to the amount and types of funds flowing through the association as well as the internal controls in place.
Errors and omissions. Another coverage becoming increasingly important to associations is professional liability, or errors and omissions, insurance. For associations that set standards or offer certification or accreditation programs, the need for this insurance coverage--to defend against allegations of unqualified recipients or inappropriate or dangerous standards--is obvious. But your association may also open itself up to professional liability claims if, for example, it publishes technical or scientific information or offers educational opportunities to members.
Directors and officers. Often referred to as association professional liability, association directors and officers liability insurance is not intended to provide professional liability coverage. The purpose of the D&O policy is to insure against wrongful acts, such as employment-related actions or allegations of mismanagement by the directors and officers who are governing the association. However, the D&O policy does not cover bodily injury or property damage, frequent consequences of inappropriate professional actions. Many D&O insurance companies are now attaching endorsements to their policies that eliminate coverage for claims arising from professional services or acts. Similarly, the commercial general liability policy will have an endorsement excluding coverage for claims arising from professional services. Routinely, the general liability insurer will require proof of professional liability insurance.
Commercial insurance is a complex subject; a knowledgeable professional is an invaluable resource in helping an association decipher the intricacies of its insurance program. Because few associations have professional risk managers, they must rely on consultants, insurance agents, or brokers for this assistance. The savvy organization is determining the role that insurance plays in its overall risk management and strategic plan. To find the answer, you must consider available resources (personnel and financial), your association's tolerance for risk, and how much insurance is enough. The risk control and management that you exhibit to minimize your loss exposure will affect the long-term costs of your insurance program.
Leslie T. White is an account executive with The Novick Group, Inc., Rockville, Maryland. E-mail: email@example.com.
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|Author:||White, Leslie T.|
|Date:||Feb 1, 2004|
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