Handling Risk Without Buying Insurance
When I left the insurance agent ranks to become a consultant, it took me a year or two to think of Risk not as just an Insurance Problem but as a Risk Management Problem. Instead of thinking that every risk existed so I could sell an insurance policy to cover it, I began to think of ways to handle risk without buying insurance. If your insurance agent is reading this, he/she is thinking “Blasphemy! Heresy! Hang that man from the nearest tree!” But, truly, insurance should be used only as a last resort. Generally, there are four ways to handle Risk- Avoid it, Reduce or Prevent it, Retain it, and finally, Transfer it. Let’s look at examples of each.
Always weigh the risk you take against the potential income from taking it. A fair number of banks have a bowl of hard candy at the teller stations to give out to their customers and their children. Choking on a piece of this candy can cause all kinds of breathing issues, not the least of which is dying. How about not offering this candy at all? Really, how many customers would be truly upset because the candy was not there?
Reduce or Prevent It
In the above example, let’s say you had a customer uprising because the hard candy was not being offered anymore. The public relations was so bad that you thought you really HAD to reinstate the candy bowl. How about changing the candy to LifeSavers? You know, the candy with the hole in the middle? Preventing choking was why they put the hole there! Yes, I guess some child might break a tooth on the candy, but that risk is certainly a reduction from the choking hazard. Again, no insurance was purchased.
Here I am talking about the conscious decision to Retain Risk not the accidental retaining of Risk. The accidental retaining of risk is when you have a potential for loss and DON’T KNOW IT. This is the Risk you didn’t identify and treat (a subject of another newsletter). No, I’m talking about the risk you decide to just take care of internally. If you have a multistory bank building, you might consider the risk of glass breakage on the windows of the third floor of your building slight enough to pay for any breakage out of internal cash. It is usually wise to set up an internal fund to pay for these types of losses. This fund would not only provide funds for these losses but force you to truly evaluate the potential loss. (I couldn’t think of a candy example of retaining risk other than eating the candy yourself!)
You might just let someone else have the risk. In the candy example, have a local candy store provide the candy as a marketing tool. The bowl could be marked “This candy provided by SweetTooth Candies located at 123 Main Street”. You will need a Hold Harmless agreement with SweetTooth Candies holding you harmless for anything that might go wrong with eating the candy, or anything else involved with that bowl of candy. Make sure SweetTooth Candies has the financial ware with all to pay for any reasonable loss. Just about any service that you offer can be contracted out to another provider. You won’t make as much money on the service but the risk will be reduced as well. Finally, you can Transfer the risk to an Insurance Company through an insurance policy (or you can TRY to transfer it to an insurance company). See? I told you insurance was a LAST resort!
You have options in handling Risk. You don’t have to run out and buy an insurance policy to cover your risk. It might not be the best option financially, and just might not be the best option by any standard. Always weigh the Risk against the Gain to be received by taking it, AND the cost of handling it.