06/24/2019
8 Non-Financing Risk Control Methods, Segregation # 4
Darius Delon, MBA FCIP CCIB RIMS-CRMP
Risk and Insurance Consultant – www.riskmanagement101.ca
Segregation is defined as “...the action or state of setting someone or something apart from other people or things…”. Thanks Google. Another word for it is separation of items at risk or don’t put all your eggs in one basket!
A simple example, from a personnel risk perspective, is to limit the number and rank of staff that fly on the same airplane. If the CEO, CFO, COO and CIO, from a public company, travel on the same plane and it crashes the company that they worked for is at extreme risk of either; failure (bankruptcy), significant reduction in share value, reduced long term strategic prospects/sales or a reduced leadership in the short term. Any one of those four could cause a loss to the company but the aggregate value of the loss of all four would exceed the risk tolerance of most public companies. This is a great example of a risk that cannot be insured and the risk control method is purely policy based with very little incremental cost (each has to get their own cab to the hotel and cannot share the expense) and reduced convenience. There is a loss of potential productivity if all four are seated together and discuss business but we can see that the catastrophic risk to the organization exceeds the incremental increase in potential productivity. A solution may be to allow 2 C-Suite members to fly on the same aircraft. This example does apply to just C-Suite members. Research teams, leadership in some departments, and activity-based risks for all of the staff can create similar personnel risks. Does the reward exceed the black swan risk?
Some examples are not as simple. Consider a large commercial real estate portfolio (200 buildings at $100mm each spread across the ten provinces equally) and the amount of insurance you need to buy. The entire portfolio might have a value of $20bn spread out all across Canada – but you would not buy $20bn of property insurance limits, it is very difficult and expensive, to satisfy your financial risk. Most times a fraction of the total can be purchased and you would be able to sleep well at night. Some would insure for the highest value building, $100mm, but this does not consider the region the buildings are situated in and the risks (fire, flood, earthquake, terrorism, other) they are exposed to. A relatively simple answer would be to insure the value of the whole city, $2bn, but you may still be over insuring the amount (although the whole city scenario is not a bad answer on the surface). The best answer considers the risks to the property (are some targets for political expression), proximity to other owned buildings (two owned buildings next to each other), the risk of the region (flood, quake) from an aggregate perspective (many buildings over a wide area are exposed to flood and earthquake), the owners of the property (political affiliation), the occupancy of the buildings (fireworks factory – don’t say it never happens – google it), the construction, elevation, etc. A full analysis should be completed if you want the best and most cost-effective answer. A thumb nail guess is ok if you are happy with a higher overall limit, more expense and it fits your risk tolerance and appetite.
With these four risk control methods (avoidance, prevention, reduction and separation) you are now exposed to half the strategies available – how will you improve your organizational risk?
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