By Marjorie Young
Risk management isn’t just for big banks. Small and medium-sized banks should also apply risk management principles.
There are three methods of risk management:
Avoidance of risk
Assumption of risk (either knowingly or unknowingly)
Allocation or transfer of risk
Risk avoidance limits growth potential. This article will discuss the last two options.
Assuming risk should be done knowingly. When a company grows, it assumes risk, but it should do so prudently by comparing its exposure to loss to its potential gain.
Allocation or transfer of risk lets a bank assume more risk without entirely bearing the exposure to loss. The bank transfer can transfer most of the risk to an insurance company while retaining part of the risk through the use of deductibles, coinsurance and limitations.
For banks, the risk-management process has four key steps.
1. Risk assessment includes identifying the bank’s total assets and major exposures to different kinds of loss, putting values on assets and resources, measuring current risks and estimating future loss potential.
What property could you lose? Who could sue you? What kinds of losses has your bank had in the past? Are some losses predictable? What are the worst-case losses it could have? What steps can it take to reduce losses?
Get an unbiased review of your risk potential. An experienced commercial insurance broker can help do this. It’s often a good idea to get a second opinion.
2. Risk control, also called loss control, means developing a proactive program to reduce or eliminate the potential of loss from risks. Even banks with good loss records aren’t exempt from premium hikes, whether in a hard or soft insurance market, because insurers factor in what they see as loss potential to the entire class of business. However, insurers do provide credits for loss-prevention efforts. Thus, you should take steps to show insurers that you’re doing everything within reason to prevent future losses.
Making your organization a safer place for employees and customers will reduce claims over time and make it a more attractive “risk” to an insurer. When more insurers compete to insure your business, you’ll get a better deal.
A loss-control professional can inspect your premises and spot all unsafe conditions that could cause fires, chemical spills, and slips and falls. A simple fix sometimes can make a big difference. For instance, one bank client was having an unusual number of customers slipping and falling. Our investigation revealed the floor near the entrance got wet and slippery when it rained. Installing inexpensive non-skid flooring solved the problem.
All banks should have a written evacuation plan so they can get customers and employees out fast and safely if there’s a fire, bomb scare or other crisis. For a small bank or branch office, a simple plan is adequate. Larger banks, especially those in high-rises, need a multifaceted plan that should be developed by an expert.
Workplace safety is crucial because accidents drive up workers’ compensation rates. A safety expert can inspect your workplace for hazards and show you how to correct them and prevent accidents. While few bank employees do heavy work, computer use can cause repetitive-stress injuries like backaches and carpal-tunnel syndrome, which can be avoided with proper ergonomics.
Today, any bank may get sued by a disgruntled current or former employee who claims he or she was sexually harassed or discriminated against because of his or her race, gender or sexual orientation. Sound personnel policies and procedures reduce that risk. Your broker, insurer or bank association may have educational materials and model personnel policies you can adopt. Insurers recognize the effectiveness of these programs and often give premium credits to customers that have adopted them.
3. Risk financing includes buying insurance or providing reserves to cover any self-insured risks. You can manage costs of insurance by determining acceptable levels of deductibles, coinsurance or limitations.
Some banks have deductibles that are too small, adding unnecessary cost. By taking on more of the risk – in other words, self-insuring a larger deductible – you can often reap considerable savings.
Using insurance to cover a few small predictable losses may not be cost-effective. For instance if your bank’s expected theft losses are $500 a year, you may want to “self-insure” this amount, as the insurer may charge more than $500 in premium to cover these expected claims. Instead of relying on insurance for small, expected losses, consider setting up a reserve fund.
Examining your loss history can help you select the proper deductible for each type of insurance – property, liability, business-interruption and crime. Don’t neglect business-interruption insurance; it can save your bank in case a natural disaster, fire or other causes that force you to close your doors for a time. For instance, a recent steam explosion in New York forced the city to close off areas around Grand Central for a few days, closing surrounding businesses and causing them to lose income.
Banks should have employment practices liability insurance and a cyber-risk policy that will cover both computer-related first-party losses (loss of the bank’s own funds, the expense of notifying customers) and third-party losses (customers’ loss of funds and customer lawsuits). Crime insurance to cover “inside jobs” by employees is a necessity.
Risk administration is the process of creating a defined risk-management structure, developing clear objectives and reviewing the program regularly. The goal is to eliminate uncertainty whenever possible.
Review your insurance and risk management program at least annually; if your bank is sizable, consider quarterly reviews
Have an insurance broker shop around well in advance of your policy’s renewal date. About three months before renewal, you broker should put together a proposal and start working on getting price quotes from several insurers. To help your broker get the best deal, provide detailed information about your bank, any claims it has filed in the last few years, and all loss-control measures it has taken.
Work closely with a broker who understands financial institutions. Since insurance and risk management are complex and detail-oriented, strong two-way communication enables the broker to serve as a consultant and work in partnership with you.
With an effective, ongoing risk management strategy and program, you can get the coverage you need at a price you can afford.
Marjorie Young is vice president of E.G. Bowman Company, Inc., in New York City, a commercial insurance brokerage and loss control firm that serves many financial institutions. She can be reached at email@example.com or 212-425-8150.