Risk Management in a Recession

I have had the same converation several times lately about how companies can reduce their premiums during this recession.  But the conversatio isn’t really much different than cost reduction discussions that I have had prior to the recession.  I think that the big picture, other than the bottom line cost, escapes many when addressing the management of premium costs. 

A company needs to be able to clearly visualize every potential risk exposure faced, and list them in terms of severity and frequency potential.  Then separate the mandated coverages like workers compensation and auto, etc., from the coverages that you are not required by law or contract to buy.  Then you can address the mandated coverages and list the possible strategies to reduce costs.  For workers compensation, it can be improving safety and awarness, which results in lower claims frequency/severity, which then results in a lower experience modification, further resulting in lower  premium.  Of course if you already have a low experience modification due to the fact that your operations are low hazard, i.e. an office type exposure, this is moot.  If your experience modification is low, but is a result of shear luck, you should still work to analyze the exposures and improve safety.  In any case, these are long term fixes and you would hope that by the time you reap the benefits, the recession will be over.  But, you will have lowered your premium costs.

For auto coverage, you can take advantage of driver training offerings from your insurance carrier.  Additionally, you can check the driving records of your employees to determine the drivers that would present a higher probability of accidents.  Insurers rate auto premium by many factors, especially the driving records of your employees and the loss history of your company.  So with better drivers and lower loss history, you will get lower premiums, it’s that simple.

The same goes for coverage that may not be mandated by law, but is mandated by contract.  A good example of this is errors & omissions insurance, also know as professional liability.  Many software/IT vendors are required by contract to carry this coverage if the are to be hired by a potential client.  The same strategy is appropriate; determine the risks that could lead to a claim, address them, and demonstrate to the insurer that you have done so.  So then, since you have done all this and an incident seems unlikely, why do you have to buy it?  Because the man with the checkbook that pays you says you have to.

Then you have the insurance coverages that are mandated by no one.  Employment Practices Liability, Cyber Insurance, and Directors & Officers (if you are a privately held company) to name a few.  This is where things get tricky and you have to make calculated decisions that could have serious future impact on your company.  But again, in getting your arms around the risk exposures to completely understand the possibilities, you can make an informed decision as to whether or not you will buy the insurance or not.

I think that you get the picture here.  Insurance coverage is not just something that you just bargain for once a year by piting a bunch of brokers against each other.  Yes, competition is a great motivator for insurance companies to put their best number forward, I agree.  But the real strategy is understanding the big picture, and making informed and strategic business decisions.  If you’re at point A, and you want to get to point B ten miles across the lake, you aren’t going to swim, you are going to drive.  Perhaps this isn’t the best analogy, but the simple fact is that you need to understand the consequences of an action before you take it. 

So now we have a recession.  If you have taken similar steps as I outline here, your insurance is one less issue to worry about.  And you can probably cancel the renewal day parade of competing insurance brokers at your office!

Cyber Criminals Caught; Now There Are Only Thousands More.

I read in the Boston Globe this morning that the almost a dozen men were arrested by the feds in connection with several of the data breach cases that we have been hearing about over the last few years.  The alleged cyber thieves were also indicated in several more cases that I had not been aware of.  As I throw another punch at the dead horse lying on the ground, let me say once again that cyber crime is only going to get worse and ALL businesses must examine their own potential risk.  Cyber thieves are tech-savvy, cunning, and most of all very creative.  If they experience good security when attempting one of their methods, they just move on to another strategy or direction.  They do not just say, oh well and retire, they adjust and innovate.  Come to think of it, if these were public companies, their stock would be smoking hot and management would always get great bonuses!  Oh, they get those bonuses anyway, but I think you get the point.
I’m keeping my friend the dead horse around for the time being, so stay tuned for an in depth report on cyber crime and risk management strategies to fight it.  It’s not going away my friends!

Treat Your Gold Like Intellectual Property

I have been spending much time lately pondering the intellectual property issues that emerging technology companies face today.  It’s like millions of hatching sea turtles trying to make it to the water before the preying birds get them, then having the perils of the ocean to deal with, hoping that they make it to adulthood.  The life sciences, software, and Web 2.0 verticals are churning out new ventures left and right like a sprinkler, and the water pressure is growing.  At this pace, the opportunity to step on someone else’s IP foot is more than possible.  To see what I mean, Google Intellectual Property Litigation and see what you come up with.  There is no shortage of IP attorneys to be found, which gives you an indication of the scope of what is happening. 

This is obviously a very important topic, and one that is evolving rapidly.  In the near term, I will be publishing a white paper on insurance strategies for the intellectual property of emerging technology ventures, as well as other businesses that dance dangerously close to IP infringement.  I will focus on some the perils of IP infringement and how the insurance industry addresses them, as well as insurance strategies to fund IP litigation in enforcing IP rights.  IP is the beating heart of emerging technology, and if you don’t treat it like gold, someone else will take it from you.  Conversely, if you don’t do your homework (or if your IP attorney doesn’t) you will face the wrath of someone else defending their IP rights.  Quite frankly, you should treat your gold like intellectual property!

Timing is Everything for Economic Resurgence

So everyone is aware of the DEFCON 4 status of the current U. S. economy.  We have a mortgage crisis, gas crunch, layoffs – you name it.  In today’s Boston Globe, a fresh serving of bad news for breakfast; the Nikkei 225 Stock Average fell 156.09 to its lowest point since July 13th.  Fortis earnings fell 50% in the 2nd quarter, and GM is in a hospice bed on oxygen.  I get it, things are bad.

In spite of this bad news, a few rays of sunshine also peaked through the Globe’s pages.  It seems that Oracle is developing 150,000 of new space in Burlington to expand their Massachusetts operations.  On top of that, there was word recently that Burlington is to be the site of a giant life sciences compound.  This is surely in response to the new Massachusetts Biotech initiative, in which one billion dollars is to be invested in new life sciences ventures in the state.  I have always been an optimist, so this is all I need for positive outlook supplement.  The Oracle development should mean more jobs and should have a positive effect on the state’s IT sector.  The life sciences compound in Burlington will definitely add jobs and provide positive resonance throughout the area.  And well, one billion is one billion, so we can assume that jobs and the overall advancement of new biotechnology will start to pump life into the Massachusetts economy. 

Of course, my usual disclaimer is that I am in fact only an insurance broker, so what could I possibly know?  What I do know is that if you look down when you’re hanging from a cliff, you will freak out and you might fall.  But if you look up and focus on getting over the edge, you will start to inch upward.  The power of positive thinking notion makes some people nauseous and they just simply don’t want to hear it.  That’s OK, as I am also a believer in freedom of opinion which falls under “Andy’s Theory of Subjectivity”.  But as Billy Joel once sang, I’d rather laugh with the sinners that cry with the saints.

So maybe, just maybe, as the monster of economic woes is closing in on us, the IT and life sciences sectors will open the door just in time for us to slip in and escape.  After all, timing is everything.

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You Can’t Have Your Petroleum and Eat It Too.

OK folks, exhale and relax knowing that I’m not going to talk about insurance today.  I heard the news yesterday that Exxon recorded record profits for the second quarter, something like 20 billion dollars.  That’s like your brother charging you $200 for a 8 oz. glass of water when you are in the desert and he has all the water.  But I’ll stop there on that line of thought, as there are plenty of other people out there today squirming in their appal that will talk about it.  

The Exxon news got me thinking about human nature and how we consume something when it appears that we have an endless supply.  Back in the sixties, we had giant automobiles with thirsty V8 engines that got 8 miles per gallon.  No worries, we just went to the gas station and filled ‘er up again.  Why would we have worried back then?  Historically, we have hunted tigers, shot exotic birds, and consumed natural resources as if it were going out of style.  We all know the results of these actions.  But if we knew that the supply of water on Earth was being used up quickly and was disappearing forever, would we stop watering our lawns or washing our cars?  I would think so.

My point is that that we insatiably consume when we perceive no threat of supply, but when then the supply is threatened, we get conservative.   But do we not have the ability to look forward?  Back in the 60’s, did we not consider the notion that the earth was only so big and the possibility that petroleum was a finite fuel?  I’m sure there were those that did see this, and they probably tried very hard to warn us.  But when there’s a bum rush on wedding dresses at Filene’s Basement, the brides to be are going to stiff arm you to get by when you try to tell them that 50% of them will be divorced within 5 years.  To me, the word conservative used to have such a boring, goody-two-shoes air to it.  But I now I view it as smart, forward thinking, and strategic, all words that are invigorating to me.

I don’t get the cliche’ that says “You Can’t Eat Your Cake and Have It To.”  Why not?  Is flour a finite food that is in jeopardy of depletion?  No, you just bake another cake, and bury your face in it, and then bake another.  Ah but petroleum, that’s different.  Jam your foot into the floor of your V6 Honda Accord and you’ll be helping to boost Exxon’s stock again.  The cliche’ should really be “You can’t Eat Your Petroleum and Have it To”.