Insurance is not Risk Management

As I mentioned in a previous post, I served as Navy Logistics Officer for over 20 years.  One of my duties was to proactively identify, analyze and prioritize pure risk associated with upcoming tasks or operations.  After that, I implemented techniques to eliminate or mitigate the effect of any potential risk on the exercise or operation.  Insurance procurement was never part of the strategy.  We simply tried to prevent risk or minimize harm. 

Fast forwarding to my second career, I found it curious the first time I was asked to contact our insurance broker to see whether there was an insurance policy to cover an exposure that concerned us. After a few similar requests from my colleagues, it seemed that this was how our risk was regularly “managed”, by purchasing an insurance policy.  When there was no time or resources to engage in a risk management process, I saw how insurance can be a quick and viable solution…but it’s just vanilla pudding.

Risk management is a parfait.  Imagine a banana pudding parfait (this happens to be my favorite which is why I am using this analogy).  On one layer, you have graham cracker crumbs (strategic plan), next you have whipped cream (policies and procedures), then sliced bananas (risk mitigation programs like loss control and emergency management), and finally the vanilla pudding (insurance).  As you can see insurance is just one layer to the parfait known as risk management.

·       Strategic Plan – Outlines the firms overall approach to risk management and defines long and short-term goals.

·       Policies and Procedures -Well written risk management policies and procedures that support the strategic plan and are the substance of the risk management program.  They may define risk appetite (what will be retained and what will be transferred to an insurance company), how to assess risk as well as how to mitigate risk.

·       Risk Mitigation Programs – Dependent on the operation.  Examples are programs for loss control, emergency management or physical or cyber security.

·       Insurance – The risk financing component of your risk strategy.   

Insurance alone is not a risk management plan.  It’s just the vanilla pudding.   

Until next time stay safe and be kind to one another.