Create Financial and Spiritual Prosperity
The language in property and casualty insurance policies can be very confusing, especially if you don’t take the time to ask about certain types of coverage; what they are? Why do you need it? What is the cost? What is the “worst case” if you don’t opt for a particular coverage? This confusion can cost policy holders a tremendous amount of money, either in a personal lines environment or a business setting. The use of a good, well-qualified and professional agent can help mitigate some of the risk inherent in determining what is the proper coverage for a certain situation. At Barnes Risk Management, we pride ourselves on being the kind of agents that can answer the questions that are important to our clients. Helping them make the proper choices to protect their businesses, homes, families and assets. Social media presents a whole new risk environment that really didn’t exist a few years ago. This is a risk that, left unaddressed, can utterly devastate an individual, association or business. We have all heard of the teacher who lost her job because she posted a picture of herself in Cancun, drinking an adult beverage. What do you think would happen if an individual, or worse yet, an officer of a business, made an offending comment on social media and the offended party files suit? There actually is coverage for that and it isn’t particularly expensive. But in order to properly insure, we must understand the terms insurance companies use. PERSONAL LIABILITY VS. PERSONAL INJURY Personal Liability – provides coverage for bodily injury and/or property damage sustained by others for which you, your family members or your business/association are legally responsible. An example would be someone getting injured on your premises from tripping on the steps. Personal Injury – provides coverage for OTHER THAN bodily injury or property damage. This includes false arrest, detention, or imprisonment; malicious prosecution; wrongful eviction; slander; libel; and invasion of privacy. This is more of a mental or psychological based claim. An example would be your child makes a harsh remark to a classmate and they mentally hurt them. Or you deny renting a property to someone because of their race. Personal Injury coverage is always excluded from a policy and it must be “endorsed” to the policy to provide coverage. With today’s social media sites like Facebook, Yelp, Instagram and others, you could be more at risk than you think for a personal injury claim. Keep in mind you can be vicariously responsible for the acts of others while they are on these sites as well. In our litigious society, people don’t hesitate to sue another because they have been “offended”. Mounting legal fees and plaintiff friendly court systems could leave a major hole in your pocket book without this coverage.
Risk Management: An Overview
In ideal risk management, a prioritization process is followed whereby the risks with the greatest loss (or impact) and the greatest probability of occurring are handled first, and risks with lower probability of occurrence and lower loss are handled in descending order. In practice the process of assessing overall risk can be difficult, and balancing resources used to mitigate risks with a high probability of occurrence but lower loss versus a risk with high loss but lower probability can often be mishandled. According to the definition of risk, the danger is the possibility that an event will occur and adversely affect the achievement of an objective. Therefore, risk itself has the uncertainty. Risk management can help managers have a good control of their threat. Every company has a different method of approach for their internal control, which leads to the diverse result for the various companies. Method For the most part, these methods consist of the following elements, performed, more or less, in the following order. 1. identify, characterize threats 2. assess the vulnerability of critical assets to specific threats 3. determine the risk (i.e. the expected likelihood and consequences of specific types of attacks on specific assets) 4. identify ways to reduce those risks 5. prioritize risk reduction measures based on a strategy Principles of risk management The International Organization for Standardization (ISO) identifies the following principles of risk management: Risk management should: • create value – resources expended to mitigate risk should be less than the consequence of inaction • be an integral part of organizational processes • be part of decision making process • explicitly address uncertainty and assumptions • be a systematic and structured process • be based on the best available information • be tailorable • take human factors into account • be transparent and inclusive • be dynamic, repeatable and responsive to change • be capable of continual improvement and enhancement • be continually or periodically re-assessed Process The first step in the process of managing risk is to identify potential risks. Risks are about events that, when triggered, cause problems or benefits. Hence, risk identification can start with the source of our problems and those of our competitors (benefit), or with the problem itself. Source analysis – Risk sources may be internal or external to the system that is the target of risk management/mitigation. Examples of risk sources are: stakeholders of a project, employees of a company or the weather over an airport. Problem analysis – Risks are related to identifiable threats. For example: the threat of losing money, the threat of abuse of confidential information or the threat of human errors, accidents and casualties. When either source or problem is known, the events that a source may trigger or the events that can lead to a problem can be investigated. For example: stakeholders withdrawing during a project may endanger funding of the project; confidential information may be stolen by employees even within a closed network; lightning striking an aircraft during takeoff may make all people on board immediate casualties. The chosen method of identifying risks may depend on culture, industry practice and compliance. • Objectives-based risk identification – Organizations and project teams have objectives. Any event that may endanger achieving an objective partly or completely is identified as risk. • Scenario-based risk identification – In scenario analysis different scenarios are created. The scenarios may be the alternative ways to achieve an objective, or an analysis of the interaction of forces in, for example, a market or battle. Any event that triggers an undesired scenario alternative is identified as risk. • Common-risk checking – In several industries, lists with known risks are available. Each risk in the list can be checked for application to a particular situation. • Risk charting – This method combines the above approaches by listing resources (assets) at risk, threats to those resources, modifying factors which may increase or decrease the risk and consequences it is wished to avoid. Assessment Once risks have been identified, they must then be assessed as to their potential severity of impact (generally a negative impact, such as damage or loss) and to the probability of occurrence. These quantities can be either simple to measure, in the case of the value of a lost building, or impossible to know for sure in the case of an unlikely event, the probability of occurrence of which is unknown. Therefore, in the assessment process it is critical to make the best educated decisions in order to properly prioritize the implementation of the risk management plan. Risk Options Risk mitigation measures are usually formulated according to one or more of the following major risk options, which are: 1. Design a new business process with adequate built-in risk control and containment measures from the start. 2. Periodically re-assess risks that are accepted in ongoing processes as a normal feature of business operations and modify mitigation measures. 3. Transfer risks to an external agency (e.g. an insurance company) 4. Avoid risks altogether (e.g. by closing down a particular high-risk business area) Potential risk treatments – Mitigation Once risks have been identified and assessed, all techniques to manage the risk fall into one or more of these four major categories: • Avoidance (eliminate, withdraw from or not become involved) • Reduction (optimize – mitigate) • Sharing (transfer – outsource or insure) • Retention (accept and budget) What is AT risk? Identifying risk factors and discussion of risk treatments is exceedingly important but identifying what is AT risk is paramount. For example, if you have no tangible assets to protect and little or no human capital at stake, perhaps the point of establishing mitigation treatments is mute. However, if you do have assets, either business or personal, at risk, your response to approaching mitigation will be focused and, generally, specific.
Race to the Bottom
The insurance industry has engaged in a “Race to the Bottom”! Many companies appear committed to commoditizing insurance products by heavily advertising savings money over every other company without consideration and understanding of a client’s needs. Worse yet, they don’t often even ask what the client’s needs are. As a consequence, there is little or no perceived value to the client for the products offered. Customers have begun the move towards buying no insurance. After all, the cheapest insurance is no insurance! In this environment, perhaps the question that needs to be asked is, “Who is being served with this business model?” Discounting has replaced value – which has gone to zero! In order to actually help our clients and protect them asks the risks inherent in life, we must be customer-centric in everything we do.
Life Insurance in a Profit Sharing Plan?
Most producers are aware that whole life insurance has been a traditional funding vehicle in defined benefit plans but there are also instances when it can be a smart choice in profit sharing plans. A little review is in order. Life insurance is considered an “ancillary benefit” and can be put in qualified retirement plans as long as it is “incidental” to the main purpose of the plan – which is providing retirement benefits. This means there are limits on the amount of life insurance that can be put in the plan. In a profit sharing plan whole life insurance premiums are limited to 49% of the employer contribution. From a practical standpoint insurance is generally limited to no more than one third of the plan contribution to maintain the contribution flexibility of the profit sharing plan design since the life insurance premiums will be a required contribution each year. 25% to insurance is frequently used in profit sharing plans. Here are a couple of situations when it may be appropriate to discuss the use of life insurance in a profit sharing plan. Owner only or owner and spouse businesses – especially for younger owners where a profit sharing design makes more sense than a defined benefit plan. Significant amounts of life insurance can be generated for younger owners who may be “insurance poor” at this stage of their careers. Growing businesses – in addition to benefiting the owners life insurance can also provide a valuable employee benefit for a profitable business to attract and retain employees – providing both life insurance and retirement benefits under one plan. And let’s not forget all the other reasons that owners and professionals consider putting life insurance in pension plans – they apply to profit sharing plans too! • Tax deductible premiums • Tax free death benefits • Insurance Portability • Retirement plan assets protected from creditors • Larger pre-retirement death benefits • Possible exclusion from estate tax So just be aware that life insurance may be an option in some profit sharing plan situations – the key element to successfully including life insurance in a profit sharing plan is that the owner understands there will be some loss of contribution flexibility as the life insurance premiums must always meet the “incidental” test which will require ongoing profit sharing contributions – but then isn’t that the reason they started the plan?