How much does insurance cost? Most employers can put their fingers on that number immediately. It is the very measure of their annual dance with insurance agents and companies alike. If it goes down, employers win. If it goes up, the big bad insurance industry wins.
How much does risk cost? Ask even the most astute of CFOs this question and you will get qualitative responses far more often than quantitative answers. Why is that? I’ll tell you. Risk is a bear to define and even harder to quantify. How can we possibly know and understand every risk that faces our business? How do we then take it a step further and tie it to dollars? It is relatively easy to buy an insurance policy. We pay a small (relatively) known loss to make sure that we don’t have to pay for a large unknown loss. We know the cost, we hope we are covered, and cross our fingers that risk doesn’t rear it’s ugly head and slap us with a big old uninsured loss.
I have heard blanket statements that insurance makes up half of a company’s Total Cost of Risk. I have heard risk constitutes 80% of a business’ Total Cost of Risk leaving insurance at 20%. 50/50, 80/20, 99/1, it does not really matter does it? I don’t think we can pinpoint a percentage, but we can all come to the understanding that risk exists in our businesses and we do have a certain obligation to control it, don’t we?
I can buy employment practices liability insurance to make sure that as a company we will have coverage in the event that we have a problem with hiring, termination, discrimination, harassment, etc. That’s the small known loss so that I know we won’t have to pay a million dollars if someone makes a bad decision. Can we just leave it at that? What if I solely rely on my insurance policy and do nothing to train my managers in the best practices in these situations? Am I allowing risk to potentially come into play? Sure I am, and that can be difficult to quantify. If I have a manager that continually harasses an employee and we do nothing to educate, retrain, or terminate that manager how much can that cost a business? Surely there will be coverage in the event of a lawsuit and a defense will be provided.
What about the uninsured portion of a loss like this? How much is my time as CEO worth if I spend countless hours in depositions, interviews, and a week in court. How about the other 10 staff people who have been deposed, etc. as well? How has employee morale been affected as a result of other supervisors and employees being overworked to make up for number of hours spent out of the office? How about morale given this manager was allowed to act they way they did for so long? Our name is in the paper, have we lost clients due to the reputational risk associated with this claim? Will we have difficulty hiring in the future as a result of what is being said in the community? How much will it cost to hire someone new to fill in the role of the employee we lost? Will they take any client or intellectual property with them to their next employer? How much might that cost us?
Could this all have been prevented with a $200 training class and implementation of the proper policy? The answer is yes, but that wasn’t part of the premium. That was part of our measurement of risk. We bought the coverage, but did not manage the risk.
This is one small example of the impact of risk on an organization beyond the purchase of an insurance policy. We do know this, insurance is certainly a necessary part of any company’s strategy to address the Total Cost of Risk inherent in their business. The total cost goes beyond the purchase of an insurance policy and we as business owners must focus not only on our premiums, but on the risks that drive cost in our business every day.