We live and breathe all-things risk here at HNI, and when it comes to risk control, a concept we like to explore with clients and prospects is owning vs. renting your risk.
At first, this may seem really abstract. But sit tight, and start thinking about renting vs. owning your risk in terms of homeownership. I call this the "American Dream" analogy.
The American Dream is about achieving success and upward mobility through hard work. When you ask someone, however, what the American Dream means to them, the most common answer is, "It's about owning your own home."
When it comes to insurance, the American Dream to me is owning your risk.
Let's say you rent an apartment. Every month, you pay your rent, and it's gone forever. Poof. Buying a home requires more planning because you need to make sure you are in a good financial spot to put down a big chunk of change. Then you have a mortgage, which likely is higher than rent. But every time you pay your mortgage, you're gaining equity into your home. Equity is your return on investment.
When you rent your risk, it's like you're paying rent every month. You've got coverage and a low deductible, but that money's gone forever. When you own your risk and have a high deductible, your premiums are lower. The money you save in a high-deductible situation is your ROI, similar to when you gain equity in your own home.
When you want to buy a home, you need to get to a place financially where you have a safety net, should you be faced with unfavorable circumstances (home improvements, job loss, car repair, medical bills... the list drags on). You're very proactive when you're getting ready to buy a home, being very diligent about saving and likely taking fewer risks that could compromise the American Dream. You work at it.
When you achieve the American Dream, you've got more skin in the game vs. when you're a renter. That skin in the game pays off in the form of equity in you home. Greater risk, greater reward.
So what does "owning" your risk mean in practice of risk control? It's about owning the actions and culture of your organization. When you're invested in preventing losses, you are owning your risk. The ROI that comes from owning your risk doesn't come easy. The challenge is two-fold: preventing claims and making sure you can recover financially should a claim come your way.
Here's another way to think of it: You treat your house better than a rented apartment. That's not to say you go out of your way to trash an apartment, but you treat your house with more care than you would an apartment you don't own. And when you own a house, you strive to get your whole family to take pride in your home and to treat it with care. When your organization owns its risk, the culture of your "family" is key to seeing an ROI on this risk management strategy. And a culture that's ready to own risk is serious about safety, pride in all work, cooperation, collaboration, reducing waste, and innovation.
It's like a high-deductible plan for health care or auto insurance. If you don't need health care often, you're probably confident that you can manage your health risks to not get close to your deductible. The return for your investment in your good health is health-care savings in the form of low premiums. It's the same deal with high-deductible auto insurance. The return on your investment for safety (driving practices, buying a safe car, etc.) is savings in the form of low premiums.
How do you determine whether it's time to own your risk? Perform a total cost of risk analysis. This involves looking at your insurance spend and claims over at least three years. Sometimes at HNI, we take clients and prospects back 5-6 years to make sure we're getting a good average and that no particularly bad year is throwing off calculations. Over a multi-year analysis, an advisor can compare what owning your risk might have looked like to your insurance program. An advisor also will walk through what makes sense financially (whether you're secure enough to "buy the house").
Common advice in owning your risk is to own as much risk as you are comfortable with. But if it's not a bit uncomfortable, you may not be owning enough risk. Instead, you should own as much risk as you can afford.
If you decide that owning your risk is the right move for your organization, our experts say it's a best practice to give the program three years to work. Should you have a loss, you need time to recover. It takes time and careful consideration in a risk control program to own your risk, and it will take time to realize its ROI. Culture change isn't overnight, and you won't see benefits from owning risk overnight, either. But for the long haul, both most definitely are worth it.
It's likely that fear is what's holding you back from taking ownership in risk. This is a prime example of when you need to apply logic in decision making. Ownership decisions are emotional. They are made (or, frankly, not made) because our minds jump immediately to the worst-case scenario that scares us from taking more risk.
Remember that playing it too safe can be risky business, too. But then again, the American Dream isn't for everybody.