Managing risk is one of the most important things you can do to maintain the viability of a business, and what many board members sometimes forget is that their association is just that, a business. Risk management—the process of identifying and minimizing risks—can help you run your building corporation more profitably and effectively. An effective risk management strategy enables you to proactively prepare for potential losses, provide a safe environment for your fellow board members, employees and residents, and even secure better pricing on your insurance.
As a member of the board, when it comes to your association, a risk can be classified as any occurrence that could have a negative impact. The first step a board should do is to identify each risk and then assess the likelihood of it occurring along with its potential consequences. Some risks are prevalent in most associations, such as building safety and security. Other risks will be unique to your association and the services you provide to residents. You should consider everything from accidents on the property to cyber-attacks to environmental risks. To get a complete picture of your risks, review your past accidents, insurance claims, and your industry's loss statistics.
The most obvious risks associated with an association are those concerning its premises. An unsafe environment can lead to any number of costly problems. The first priority should be ensuring that the premises are safe and secure. Physical premises are also vulnerable to natural disasters, including fire and flood. Investing in insurance coverage for these incidences will help your business stay on track in the event of costly damage to its facilities.
While it may be impossible to identify every potential threat to a co-op or condo association, a risk assessment process can help you identify future problems and minimize potential costs in advance.
Once the risks have been identified, your association needs to identify which ones are most likely to happen and which ones would have the greatest, adverse impact on your building community. Prioritizing risks can be difficult, but assigning a monetary value to each one can help simplify the process.
Implementing Your Plan
Once risks are prioritized, it's time to begin developing your strategies to manage them, starting from the most important. Once a response plan is in place, you'll need to ensure that it's effectively implemented.
There are three major risk management strategies that you can employ:
Avoidance—Eliminate an activity, service or practice that puts your business at a level of risk that threatens its future viability. Certain business activities may prove too costly when compared to the benefits that would be associated with that activity. In these instances, it may be better to pass on the opportunity and the potential earnings to avoid the risk of significant losses.
Transfer—Investigate opportunities to transfer the risk of loss to other parties. Passing the risk of financial loss to an insurance company is the most common form of risk transfer. It's very important to work with a trusted insurance adviser who can review your risks and risk management plans on an annual basis to ensure that your insurance coverage meets your need. As time goes on, your association may discover that it is over-insured in some areas and under-insured in others.
Mitigation—Since it may be impossible to transfer risk entirely to a third party, determine what steps can be taken to lessen the impact of losses should they occur. Ways to mitigate risk include developing policies and training programs that reduce losses. If your association can demonstrate a downward trend in losses, talk to your insurance broker about communicating your efforts to your insurer so you can be rewarded with reduced insurance premiums.
After reviewing all the possible options and looking at your risks, decide which of the possible risk management techniques best strikes a balance between effectiveness and affordability.
Keep accurate records to demonstrate that your association is doing everything it can to reduce risk and react to emerging risks. It shows your insurer that you are committed to risk management and have a history of implementing well thought out plans.
Your board should speak to your broker to explore options when it comes to managing risks for your association. Risk management is a way of thinking that must permeate the whole organization - from board members to residents, visitors and employees. Making it a part of all decision-making processes is important to creating a culture that values risk management.
Frank DeLucia is senior vice president of HUB International Northeast, a global insurance brokerage offering a broad array of property and casualty, life and health, employee benefits and risk management products.