Risk Management
Q. In your last column, you talked about risk management and said that you would discuss it further in a later column. Could you do that in your next column so that we, as owners, can get a complete picture?
A. Sure, we are glad to follow up and discuss risk management. Simply put, risk management is the process of making and carrying out decisions that minimize the adverse effects of accidental losses. It involves five steps:
 Identifying exposures to loss
 Examining alternative techniques
 Selecting the best techniques
 Implementing the chosen techniques
 Monitoring and improving the risk management program
Remember that each phase of the risk management process is designed to assist the Association in identifying risks and implementing a plan that will safeguard Association assets and protect the Association from claims which consume significant time and, sometimes, money.
Risk management is a five-step decision-making process that is implemented by performing four basic activities: planning, organizing, leading, and controlling.
The risk management begins when the Association identifies exposures to loss in four areas: property, liability, net income, and personnel. This includes reviewing all of the possible risks. Risk is anything that threatens the ability of a nonprofit organization to accomplish its mission. Some examples that an Association would want to review include:
 Pools
 Playgrounds
 Theft of Property or Monies
 Ponds
 Lakes
 Fire
 Flood
 Hurricane or Wind
 Activities of Staff
 Hiring and Firing Practices
 Security
These are but a few examples of the many areas where an Association has potential risks. The various risks can be identified by a physical inspection of the property and a review of the procedures used by the Association. We recommend that the Association create a special committee to identify the risks and organize them into appropriate categories.
Once the risks are identified and sorted, the next major decision for the association is how to reduce these risks
The first way is risk avoidance. This is simply not performing an activity that could carry risk. An example would be closing the pool or removing the playground. Another example would be not to hire any employees. Avoidance may seem the answer to all risks, but avoiding risks also means losing out on the positive benefits that the risk may have allowed.
The second approach is risk reduction. This means reducing the potential severity of the loss. Examples would include adding sprinklers designed to put out a fire to reduce the risk of loss by fire. This method may cause a greater loss by water damage and therefore may not be suitable. Another would be by redesigning the playground to provide a safer facility. Another example would be by creating strict personnel policies that cover hiring supervision and firing.
The third approach is risk retention. This involves accepting the loss when it occurs. In plain English it means knowing the risk is there and simply agreeing to pay the cost when the problem occurs. Risk retention is a viable strategy for small risks where the cost of insuring against the risk would be greater over time than the total losses sustained. All risks that are not avoided or transferred are retained by default. This may also be acceptable if the chance of a very large loss is small or if the cost to insure for greater coverage amounts is so great it would prohibitive to pay the premium
The fourth approach is risk transfer. This means getting another party to accept the risk. Insurance is one type of risk transfer that uses contracts. Other times it may involve contract language that transfers a risk to another party without the payment of an insurance premium such as with an outside contractor.
It is crucial that the Association meet with its insurance professional to discuss the identified risks. The agent should be able to help you identify those items that can best be addressed through insurance.
At this point, the Association selects, implements, and monitors a risk-financing plan. The purchase of commercial insurance, although very important, is only one part of that process.
Associations must delegate risk-management analysis to appropriate staff and professional to protect its assets from accidental loss. This periodic analysis must be reviewed by the board, which then makes the appropriate risk management decisions. Monitoring the plan on an on-going basis is crucial to a successful plan. This is not a static one-time process. Conditions change, laws changes and more importantly risks change. By monitoring and continually re-evaluating the risks, the Association will minimize its chance of having a significant loss.
Today is the day to start. Contact your insurance agent, your manager, your attorney and any other professional that can assist. Then begin taking the steps to assure that you have identified, organized and controlled the risks.