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By Christopher Gallo, CIC Services
The start of 2021 seemed promising as many businesses reported confidence in their business outlook. Small businesses, in particular, were optimistic regarding a rebound, with nearly 60% of respondents reporting they expected a significant rise in revenue from 2020, according to Bank of America’s Small Business Owner Report. It’s true that many businesses, large and small, found a respite as COVID-19 restrictions subsided, enabling them to resume their normal operations—and some industries have even thrived the past year. Industries within the travel sector, for instance, topped the list of fastest-growing by IBIS World as travel restrictions diminished. Yet, despite the optimism and some industries winning, for others, 2021 proved a difficult year that was fraught with unpredictable crises that had both national and global implications. The fallout was not only costly but impacted survival.
Looking back on 2021, it behooves CEOs to learn from the unforeseen events and incorporate what is gleaned in their risk management strategies to provide a solid financial footing in 2022.
Texas Power Outage Leaves Businesses Frozen
Businesses certainly never expected a polar vortex would strike warm weather Texas, resulting in millions of dollars in losses. On February 15, a massive and unseasonal storm with frigid temperatures spiked the demand for power and outpaced the supply, severing power to 26 million Texans.
Heat waves, hurricanes and wildfires can also create power outages—and outages are more common than business leaders may think. S&C’s 2018 Commercial and Industrial Power Reliability Report found that one in four businesses experience at least one power outage per month. The Department of Energy estimates that these outages cost companies $150 million per year.
Unpredictable weather patterns present risks for business owners. However, it also creates an opportunity to improve their risk mitigation strategies to address future uncertainties.
Ever Given Disaster Impacted Global Supply Chains
On the morning of March 23, Ever Given, the 1,300-foot-long container ship traveling along the Suez Canal, was wedged within the waterway for six days. The blockage provided ships with no way through the world’s busiest trade route—a route with an estimated 12% of global trade moving throughout. During this time, over 350 vessels waited for the ship to be freed, with the blockage delaying an estimated $400 million per hour.
With a global supply chain already stressed by the COVID-19 pandemic, the delay of thousands of containers loaded with consumer items—in addition to empty containers necessary for shipping—translated to inventory shortages and idle assembly lines. The impact on the global supply chain was significant.
The incident showed that even the most unforeseen events often can, and will, happen and that supply chains can face risks throughout every step in the process—highlighting the need for supply chain risk management.
Labor Shortages Plague Businesses Amid Busy Holiday Season
Combined with delivery delays and supply chain bottlenecks, job openings have reached an all-time high of 10 million in the U.S., according to the Department of Labor. These are positions businesses desperately need filled and have placed added pressure. And for some, it’s not only pressure but an ability to maintain critical operations necessary to drive much-needed revenue. This is alarming since even prior to the holiday season businesses have experienced the fallout.
The release of a U.S. labor market report in August showed workers quitting at a historical level, but the rates were much higher among small businesses with fewer than 50 employees. While larger businesses can offer robust benefits and higher wages, their smaller counterparts don’t always have the resources to do so—or the financial foundation to withstand decreased operations, closures or a revenue reduction for a sustained period.
This situation further shows businesses must be better equipped to navigate and remain viable during crises, whether it’s a pandemic, natural disaster, supply chain disruption, litigation, or in this case, a lack of workers.
Rise in Cybercrime
The COVID-19 pandemic drastically altered the workforce, with companies across the country suddenly moving to a remote or semi-remote structure to protect their employees. The number of Americans working from home continues to rise, and according to the latest Gallup Panel data, the percentage of workers who say their employer is offering them flex time or remote work options has grown from 39% to 57% percent. Even with offices reopening during 2021, many have chosen to retain either a remote workforce or hybrid model. In fact, 68% of the nearly 300 executives interviewed as part of Deloitte’s April 2021 Return to Workplaces survey reported that they intend for their corporate workforce to operate in a hybrid model.
While a remote workforce has benefited employees and saves employers upwards of $11,000 per year per employee in reduced overhead, it does create vulnerability—companies are more susceptible to cybercrime. With the use of new remote workforce technology, a business’s systems are weakened. Also, even the most well-meaning employees can make mistakes leading to data breaches. These breaches can be costly and even decimate a business. While cybercrime can cost large businesses millions of dollars, small businesses are not immune, and according to data from Accenture, 43% of cyberattacks are aimed at small businesses and cost $200,000 on average. It’s important to protect company revenue and health by mitigating the risk of a cybersecurity breach—especially as more and more workers are working remotely from home.
What These Crises Have in Common
With the incidents throughout the course of 2021, most were unexpected and difficult to have predicted. The events also shared the characteristics of being complex, evolving risks which makes protection more challenging. For example, insuring against these risks with commercial insurance alone likely wouldn’t have been enough. The nature of these risks renders them complicated to insure against as they can be unavailable or costly. Also, although property insurance, business interruption insurance or even cyber policies may seem to be viable solutions, an unexpected policy exclusion can be devastating and result in a claim being denied—leaving business owners and leaders feeling helpless. However, there are other solutions, combined with commercial insurance, that can provide businesses with a strong financial posture to weather any storm.
For survival against any threat, it’s clear businesses need two things: more insurance and more money. For business leaders and executive teams, if they could have seen the future in 2021, they likely would have done some things differently, and most would have figured out a way to insure more risks – particularly business interruption – and to have more money set aside for contingencies.
This is where Enterprise Risk Management comes in—the discipline by which an organization in any industry assesses, controls, exploits, finances, and monitors risk from all sources for the purpose of increasing the organization’s short and long-term value to its stakeholders. Basically, a team lays out all the risks the business may face and puts a plan in place that could include risk mitigation measures, commercial insurance, or captive insurance. This process brings to light certain risks that are commonly uninsured in addition to risks that are underinsured.
The dilemma is that when a business purchases more commercial insurance but does not have claims, the premiums are a sunk cost. This is where captive insurance is helpful as a part of a robust risk management strategy. Since the business owner or business owns the captive insurance company, if it does not have claims on its captive insurance policies, the premiums are profit. Captive loss reserves not paid out in claims or expenses accumulate year-to-year. This accumulation of loss reserves can pay claims to the business in the event of an insured loss and provide a powerful defense against the unexpected, including the impact from supply chain interruption, power outage, a labor shortage or cybercrime.
So, before the new year arrives, businesses should start now and assess their risk management strategy and review their insurance policies for gaps and exclusions and while also ensuring the company has a stronger business model with both more insurance and more money.
About the Author
Christopher Gallo spent his career in risk management as a regulator with the Connecticut Insurance Department. He has taken the lessons learned from over three decades to apply them to improving risk mitigating strategies for businesses. Chris graduated from Central Connecticut State University with a Bachelor of Science degree in Administrative Science and obtained his Certified Financial Designation from the Society of Financial Examiners. After retiring from his regulatory career, he joined CIC Services in 2020, and consults directly with business owners, CEOs and CFOs in the formation, and as regulatory liaison, of captive insurance programs for their respective businesses. CIC Services, LLC manages over 100 captives.
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