I was trained as a financial planner. In the course of my career, I counseled hundreds of individuals, families and businesses of all sizes on a range of financial-planning issues.
People often have different interpretations of what “financial planning” actually means. Simply stated, it involves helping an economic entity (whether an individual, family or business) accomplish its stated financial goals and objectives. For individuals and families, that could involve acquiring higher education or a retirement fund, or minimizing income or estate taxes. For businesses, financial plans could involve attaining financing, growing revenues, or developing strategies for product or geographic expansion.
But here’s the bottom line: No matter what anyone’s financial goals or objectives are, they are incomplete — indeed, woefully inadequate — if they are not based on a sound foundation of risk management and insurance. Too often, these are afterthoughts that are not central to the strategic aims of a business. Our clients cannot be successful unless and until they can effectively manage risks.
A random or unexpected event, such as sickness or death of an individual, a catastrophic lawsuit or a natural catastrophe, can ruin the best-laid strategies for a business. No matter how big or powerful, no entity is immune from unexpected and devastating setbacks. Work-site explosions, massive data breaches and geopolitical incidents creating turmoil in our increasingly interconnected world are just three examples of events that have compromised the financial health of companies in the recent past. Some are still recovering.
This underscores the importance of a sound risk management program that encompasses four key steps:
- Identifying loss exposures.
- Prioritizing those exposures.
- Developing strategies for avoiding, reducing, retaining and/or transferring risk (including through the use of insurance).
- Monitoring the program on an ongoing basis, and revising it when necessary.
I am deliberate about saying “when necessary,” not “if necessary,” because situations and circumstances are always changing. Accordingly, a risk management program always has to be modified to adapt to these changes.I’m not trying to get too academic here.
I’m simply arguing that, based on the importance of risk management, insurance agents, brokers and consultants are the most important advisors that individuals, families and businesses have.
Unfortunately, these people often don’t act like essential advisors, behaving too frequently as “order takers” who scour the market for the lowest possible prices.
I understand why this is the case. Insurance consumers typically believe that if they must buy insurance, the goal is to get the cheapest available. They have been misled to believe this, but we all know how it ends: You get what you pay for.
It’s important that we take pride in what we do and be more assertive about the importance of our role in advising our clients. Business is about taking calculated risks, including but not limited to the risks associated with launching a new product, expanding geographically or acquiring a competitor. We need to be involved in those discussions.
In explaining your value to a prospect or client, do so in the context of how you can help them accomplish their stated objectives. Bringing this attitude to the table can be empowering. Try it.
Care to challenge my proposition that risk management is the most important priority any economic entity must address properly?
Email your comments to me.