Sing your praises

Recently, well-known UK high street names such as Woolworths, Zavvi and MFI have ceased trading, while in the first quarter of 2009, 1,311 companies were placed into administration in England and Wales according to statistics released by the government's insolvency service. The result is that a significant number of UK risk managers have either been made redundant, or have not been replaced as incumbents have left – with AIRMIC suggesting that they have lost around three per cent of their membership.

With no end to the recession in sight – the UK economy declined by 0.8% between April and June of this year – risk managers clearly need to demonstrate the real value that they deliver as powerfully as possible to their management and boards, so that organisations going through a tough period do not see them as a luxury they can do without.

It is clear from speaking to insurers that at least the underwriters understand the value of the risk management function, and believe that it adds demonstrable value to the insurance placement process. In the early summer, Lockton International undertook a sample of opinion in the London market among a range of capacity providers. For 83% of the underwriters asked, a risk management function within a company favourably influenced the pricing they could achieve.

However, according to one senior business leader: ‘Top executives and even middle management generally wonder just what a risk manager does all day, and, when belts are being tightened, many think that the role could easily be consolidated within the functions of the chief financial officer (CFO, financial controller or assistant treasurer.’

In this environment, there are some key things that risk managers can do to clearly demonstrate the value of their role:

Speak to be understood

Risk managers are seldom fired because they are not up to speed on the latest commercial general liability form or state-of-the-art policy wording. Instead, the biggest issue appears to be that risk managers are not seen to speak the same language as the upper management and boards of the companies for whom they work. For example, while risk managers may be worrying about the insurance cycle, CFOs are concerned with cash flow – so it is communication, not competence, that is the issue.

Risk managers need to hold a mirror up to their company and see it from both an external and internal perspective. This might mean looking at analysts’ reports to understand where the perceived strengths and weaknesses are, or at earnings-related statements to see what promises have been made to investors.

Internally, it is a question of knowing the issues that the CFO considers to be key whether cash flow, financing costs, or possible operational risks. By doing this, the risk manager can position requests for additional expenditure within the overall context of the business and its overall financing requirements.

The elevator test

If holding a mirror up to the company can be an illuminating experience, undertaking a similar exercise for yourself can be even more so. If you met the chairman of the company in the lift on the ground floor and had only 12 floors to tell him what you did, could you pass that test? Important facts that you might want to consider having at your fingertips may include a figure representing the value you have added over the past couple of years, an overview of the key areas of risks for the business, and two or three current or future issues that need consideration. Your personal balance sheet should look at both the costs you generate for the business (salaries, overheads, funding retentions, premiums etc) as well as the assets (losses avoided, premiums saved, coverages extended – and possibly even lives saved).

Communication with other internal audiences is also vital. Risk managers have dealings with a wide group of stakeholders and need to ensure that their colleagues buy into the process and do not see it as an annual irritant. Communication should be regular and substantive, so that everyone understands the context of what is required and the direction that is being taken. The last thing that you want is for information-gathering to become just a box-ticking exercise.

Fortune favours the bold

Times of trouble can throw up opportunities as well as threats, since they offer a chance to take a radical look at what you have always done. When even the status quo involves risk, then why not look afresh at the issues? Businesses have been seeing asset prices moving fast, business interruption values fluctuating sharply, and according to the banking industry cash flow is the number one issue facing business today. By knowing the business better and not being shackled to previous insurance programmes, the risk manager can demonstrate that he or she is genuinely in step with the strategy in trying to manage the risk profile.

A more radical approach would be to find an opportunity to talk to the board – for example, they all have a very personal interest in directors’ and officers’ insurance – and to offer to build a programme that can really respond to cash flow requirements. This might include larger retentions, fewer opportunistic purchases and a look at new carriers, as well as squeezing as much free risk management or claims management assistance from insurers as possible.

Risk managers recognise that the benefit of what they do is often only in the spotlight when disaster strikes. Given that many people think that losses will not occur, this is not a robust justification of their role. The key is to take the broadest possible view of the role within the business, ensure that its goals and strategy are understood and reflected in the risk management function, and, most of all, that there is clear, consistent communication about what is being done, why, and the specific benefits it delivers. n