Risk Management

A winter storm moved into town one Saturday evening about 10 years ago. Our son, Jason, came home early from his job at the pizza joint; business was slow. The freezing drizzle allowed us to play. We slid down our driveway, laughing all the way, and came to a gentle stop at the street’s edge. We found traction near the tree line to the east of our driveway, climbed to the top, and slid again and again.

The next morning I needed to decide about holding Sunday services. As I stepped onto the driveway I instantly started down the hill. Whereas I had some control the night before, I had no control on the slick surface that morning. I traveled the full length of our driveway, a 20-degree slope, gaining speed each second. Still on my feet, I crossed the road and started down our neighbors’ driveway. I had to lean to the right to slide between the vehicles parked there. But then I faced the rapidly approaching garage door. I promptly sat down, in part to avoid the mirror on the van, grabbed the front tire of the car as it flew past, and jerked to a stop just inches from the garage door. Whooee! What a ride!

I had another bout with an icy driveway a year ago with dramatically different results. I intended to go to the mailbox, but instead, Mother Nature lifted me off my feet and body-slammed me to the mat. My wife, Judi, saw my head bounce off of the concrete. Several weeks later it became evident that my left shoulder took the brunt of the fall. It’s been a painful year, including surgery.

To manage the icy driveways of life, a person can choose from several (or a combination) of risk management options.

One is avoidance. I could have left the mail in the box until spring, or at least until the ice melted, and thus prevented the fall. A pastor can refuse to meet alone with a person of the opposite sex and a church youth group can give up using 15-passenger vans.

A second way to manage risk is through reduction. I could have worn golf shoes to reduce the risk of slipping on the ice. A pastor can have another person in the building while in a pastoral counseling session and a church can secure loose carpet as part of their risk management plan.

A third way to deal with risk is to transfer it. I could have asked Judi to get the mail and let her take the risk of navigating the ice. Insurance is a common way in which risk is transferred. For the price of a premium, the insured transfers the risk to the insurance company. If there is a loss during the time the insurance is in force, the company bears the financial burden. Fortunately, I had health insurance that paid the medical bills following my fall.

A person or church can choose to deal with risk through retention. Efforts are made to avoid or reduce the risk, of course, but the remaining risk is not transferred through insurance or outsourcing. I find it humorous that a salesperson will pontificate on the quality of an item, say a flat screen HDTV, then try to sell me an extended warranty. I usually skip the extra charge and in doing so I retain the risk that the unit will not perform as promised.

When does it make financial sense to purchase insurance? When the loss would be catastrophic, but the probability of that happening is low. Because the probability is low, the premium will be more affordable. We have casualty insurance on our house, for example, in which we pay a modest premium to transfer the risk of loss due to fire. That loss would put a huge dent in our net worth, so it makes sense to pay a little for the protection. We have retained part of the risk in the form of the deductible. We also attend to reducing and avoiding risk, with increasing diligence in the past year.

On that cold Sunday morning a decade ago, somewhere on my downhill slide, I decided we would not have services. As I sat in my neighbor’s driveway, the challenge I faced was about how I’d get home to make the phone calls.

Originally published by Pensions & Benefits USA.