Crisis as a Peril™ Part III
Crisis as a Peril™ Part Three
Crisis is an unusual business. More and more, Crisis as a Peril™ represents a bigger risk to the insured than the underlying cause.
Why do insureds buy insurance? Often, they buy because they do. In automobile insurance, it is a regulatory requirement. For homeowners, it is a condition of securing a mortgage. Often, however, in the business environment, insurance is a true risk management tool. It is part of the process used to mitigate or eliminate exposure of a financial nature. Unfortunately, the financial exposure is just a small part of the overall picture when an insured has a claim.
Fire, flood, workplace violence, or active shooter, it does not matter what the peril is that causes the damage. Most incidents that give rise to claims are also the cause of crisis for the insured. Very few insureds have thought through the damage that the crisis itself will create. For example, an explosion at an insured’s plant may not have significant direct financial impact to the company. Property insurance, workers compensation, business interruption, etc. will take care of the financial impacts, but what are the consequences of the explosion?
Often, is the insured’s response to an incident causes the crisis. Whether it is an insured peril, or a crisis arising from an unexpected situation such as a viral social media post, the way in which an insured handles the situation can determine the long-term consequences. There are certain key steps in handling any adverse situation that can dramatically improve the outcome, and reduce the probability of negative consequences further down the road.
Approach to Mitigation
Once the concept of crisis as a peril is accepted by a risk manager, the approach to mitigating this exposure is no different than any other. First, one must understand what the exposure is, who is affected by it, and what communications are required. Then, appropriate plans can be drafted to ensure the best probable outcomes. All of this is easy to say, now, in peace time, when there is no crisis. The problem is a crisis is not business as usual, it is “business as unusual”. The human mind does not respond to crisis in a predictable fashion. This is why having a crisis response strategy can dramatically affect both the frequency and severity of an insurance program.
When an event occurs – one which threatens the lives, property, reputation or safety of families, friends or businesses, certain brain chemicals are released which change the behavior of the average individual. Planning for these changes now – when there is no crisis – can dramatically improve the outcome. So how can an insurer, broker or risk manager provide assistance to an insured in crisis?
Assistance to the Insured in Crisis
When something dramatic occurs, whether a traditional exposure such as fire or flood, or something else like a brand and reputation exposure, what the insured does in the first minutes, hours and days will dramatically affect the financial, emotional and reputation outcomes. The greatest service that anyone can provide in this beginning stage of a crisis is to get the insured to STOP – STOP in a crisis situation is both an acronym and a best practice.
As a best practice, it is important for anyone in a crisis situation to slow the flow of events down to a manageable level. The always present adrenaline in a crisis situation causes people to react far too quickly. Mistakes are always made. It is so important, in any crisis situation, to stop and take the time to truly appraise the situation.
As an acronym, STOP, stands for Stabilize, Trigger, Opine, Prevent.
Stabilize. A big part of the stabilization function is the very act of stopping. Once the escalation and flow of events is halted, even for a short period of time, the brain has time to reflect on all of the issues, people and communications which need to be addressed. It also allows one to start to see what a priority of a crisis event might be, and how a reasonable plan might come together to achieve the best outcome.
Trigger. Every crisis is “is business as unusual”. Therefore, expecting business as usual individuals – utilizing the same tools and resources – to manage the situation to the best outcome without a plan is irrational. Crisis situations require appropriate resources to be triggered. These resources often include crisis managers who have actually managed a crisis; Lawyers who have actually been involved in similar situations; Insurance companies, brokers, claims people and others who understand not just the financial impacts of the situation, but the holistic outcome, over the long-term, to the insured.
Opine. In a crisis an insured is always faced with a myriad of choices. Some of these choices are easy to interpret. Others are not. Often, the insured must make the choice between two bad options. It is often difficult for the insured to do so since they may be in a fragile physical and emotional state. They need trusted advisors – advisors who have been involved in many crisis situations – to opine on what the best overall strategy is, how the decisions fit into the crisis strategy and what the consequences of this might be.
Prevent. It is so important in a crisis situation that the trusted advisors prevent an insured from making many of the classic mistakes. These mistakes, often made in the first hours of a crisis, cannot be corrected and will affect the frequency and severity of claims, the consequences of the behaviors, and the long-term brand and reputation of the organization. Almost ubiquitously, those involved in the crisis feel the need to explain. An entire book could be written and titled “When you’re explaining you’re losing”. There is no way to explain why one of your workers is dead or why the racial term used by one of your employees was not a reflection of your organization. There will be time, in the future, to manage any situation pursuant to a well-thought-out plan.
“When you’re explaining you’re losing” is just one of many classic crisis mistakes which are made by organizations. Very often, senior leadership feels the need to speak publicly, or worse to interact with the press, without a complete, well-thought out, thorough plan. Invariably these situations have a sub-optimal result. Another very significant problem in crisis is the failure to look at all of the vulnerabilities and exposures that the situation creates. As a result, there are often forgotten or ignored constituents who are essential to the continuing operation of the business. These situations can result in consequences which are not correctable. For example, if an organization involved in an allegation of racial misconduct fails to recognize that communication with legislators in their district is required, there is a backlash that threatens the existence of the organization, long after it is thought that the issue has been resolved.
Crisis STOP™ is an essential tool for all insurers, brokers and risk managers to use in order to control the pace of a crisis situation. The insured will always feel a sense of urgency that is different from the outside advisor. It is essential that the crisis advisor “pull back on the reins” as hard as possible. This slowing of the process will meet with strong resistance in many situations, but could be the thing that results in a far better outcome for the insured.
Crisis is an unusual business. More and more, crisis as a peril™ represents a bigger risk to the insured than the underlying cause. In fact, sometimes, there is no underlying cause. Yes, a crisis must evolve from something, but often it is not a major or cataclysmic event. In today’s technologically advanced world, a misplaced word, an unintended gesture, or almost anything else can result in a situation that makes its way around the world in seconds and causes a flow of consequences which could not have been envisioned. For the risk manager, this represents a difficult situation. If you can’t envision the cause, how can you mitigate or limit the exposure? The answer is simple:
Prepare for crisis. Recognize Crisis as a Peril™.