Why Worry? The benefits of preparing for low-frequency, high-consequence events.

• Author: Hoffman, Daniel P.
• Position: RESOURCE DEVELOPMENT

Crisis management and contingency planning. Those five simple words can cause the most competent business executives to lose more than a few good nights' sleep. Everyone is busy, and most managers and administrators tend to expend the majority of their focus and energies putting out the operational fires of the day (or week, month, quarter, et cetera). When asked to consider the dire consequences and ramifications of a potential event-especially for those that likely have a small chance of actually occurring--it's often far too easy to place consideration for such matters on one's to-do list, perhaps when things quiet down somewhat.

The problem, of course, is that things are never going to quiet down. A whole new set of problems and other "high-priority" issues invariably come to the fore, making it all too easy to push emergency management and contingency planning to the bottom of the pile. If a business or organization is lucky, there will be no real consequence realized from such inaction, as--by definition--the low-frequency event will likely never materialize. However, if such an event were to happen, the high consequence nature of such circumstances could derail an entire operation and perhaps even bankrupt one's business. Given the high stakes involved, can you really afford to gamble when it comes to such planning?

The Good

Thankfully, most large businesses are supported by a team of insurance and risk professionals (either in-house or on a contracted basis) and are often served by a professional brokerage company. The broker who services the business helps to navigate the ins and outs of multiple insurance companies, policies, and overlapping lines of coverage, providing strong feedback and recommendations to the business' senior leadership. This feedback then guides the purchasing decisions that map out a comprehensive array of policy coverage. If one has a knowledgeable and experienced broker, particularly within a specific sector of operations (e.g., oil and gas, mining, construction, et cetera), then the resultant group of purchased policies should provide sufficient coverage for most eventualities.

The Bad

Unfortunately, there seems to be a continuing and pervasive gap between "financial risk" professionals and "operational risk" practitioners. While the financially oriented actuary wil. likely reduce probabilities and outcomes of any given event to a list of formulas and percentages, thereby calculating potentials for loss...