Do you need to buy SAM insurance now?

As we write this, in August 2020, many organizations will be considering whether they should buy SAM insurance now.

  • Schools are out and there is no certainty when they will re-open to pupils or how;
  • church attendance is well below normal and collections have fallen;
  • some non-profits and charities have seen increases in demand for their services and others a significant fall, while most have seen their revenues fall;
  • hospitals, unfortunately, are fuller than ever; and
  • transportation is much quieter than usual, with a corresponding impact on revenues.

All the main SAM risk sectors are facing cost pressures and will be questioning every expense.  With most sectors seeing reductions in the types of activity that would normally expose them to SAM risk, SAM insurance is a reasonable cost to question. 

There is obviously no right or wrong answer.  For many organizations, the issue is more likely to be how to reduce the cost of SAM insurance or mitigate the impact on premium of a hardening insurance market. 

Whatever question you pose, as a risk manager, these are some of the issues we think you will want to consider:

SAM risk is an existential risk to most organizations

That one existential risk (COVID) may already be threatening your organization makes it more, not less important that other existential risks, like SAM, don’t make trying to survive COVID even harder.  How much extra pressure would crystallization of any other material threat add to the challenges your organization is already having to deal with?

COVID is changing SAM risk 

As an example of changing SAM risk, when term starts next month, negligible attendance would reduce many ‘traditional’ forms of school SAM risk.  But the adoption of on-line teaching technology and additional childcare facilities (for teachers’ children) will create new forms of SAM risk.  These risks may not be as significant as better known SAM risks, but they are not negligible.  Are you confident you know how to adapt your SAM risk management system to accommodate them?

Overall, we suspect SAM risk may be slightly less likely to crystalize now than it was, but the potential consequences if it crystalizes are likely to be as severe as ever. 

COVID has reduced many of the activities that give rise to SAM risks.  But, even a complete shut-down won’t necessarily eliminate SAM risk.  Organizations don’t usually know about SAM events until after, and sometimes not until long after the event.  The kind of SAM insurance you have or are you considering – claims made or occurrence – will make a difference. 

COVID has also reduced the risk-bearing capacity of many organizations because of reduced revenues and income.  Based on your new risk bearing capacity, is transferring SAM risk, or any risk for that matter, more or less important and valuable than before COVID?

COVID will also have reduced some organizations’ risk management capacity.  Your organization may be less effective at, for example, prevention, identification, and mitigation because fewer people are working, working out of place, or working for longer each day.  Are you confident you have access to the expertise you need to understand changes in your SAM risk and will you have access to the expertise you might need if SAM risk were to crystalize?

COVID is changing how SAM risk needs to be managed
  1. The context of SAM risk management is changing; less risk bearing and managing capacity make effective SAM risk management practices more important than ever.
  2. Cost cutting will likely be a significant contributor to surviving COVID; cost cutting while maintaining SAM risk management effectiveness will be challenging.
  3. De-risking will also be important to many organizations.
  4. Because SAM risk has changed, SAM risk management will be more complex in the short term because of the novelty of the new environment, the new SAM risks, and the new controls and metrics you may need to deal with. Learning while de-risking and cost-cutting is another challenging balancing act you will need to plan carefully.
  5. Stakeholders – parents for example – will likely accept that a school, church, or non-profit needs to de-risk to accommodate reduced risk bearing and managing capacity. They will also accept the need to cut costs.  But they will also want you to credibly assure them that, between de-risking and cost cutting, you have not compromised SAM risk management effectiveness.
COVID is changing the options for treating SAM risk

On top of these organizational, risk, and risk management issues, the decision whether to continue to buy (or how to reduce the cost of) SAM insurance will also be impacted by changes in the availability of some of the other traditional risk treatment options.  Acknowledging that avoidance isn’t really an option – a school can’t stop being a school: 

  1. Sharing, by contract, is likely going to be more difficult to arrange now because most organizations are more likely to be de-risking than accepting more risk.
  2. Transfer (insurance), though less readily available and more expensive, is still valuable.
  3. Increasing acceptance will depend on how much an organization’s risk bearing or managing capacities have been impaired and the corresponding need to de-risk.
  4. The last option is to reduce the likelihood and potential consequences of SAM.  Any organization can improve its SAM risk, so it is likely the simplest, most cost effective option currently available though, depending on the nature of the initiative, may be more time-consuming than others.  Reducing likelihood and potential consequences is also a helpful framework in which to address the twin and (unless carefully undertaken) potentially conflicting objectives of simultaneously cost-cutting and de-risking. 
COVID changes what SAM insurers need to hear

Having considered all these issues and if you decide to buy insurance, the last issue concerns how you convey to an insurer how you have addressed all the previous issues.  SAM insurance premiums will be heavily influenced by the quality of the information you use and the stakes are high – the more so, the bigger and more complex your SAM risk: 

  1. Not addressing these issues or doing so with poor information could lead to an inability to buy or renew SAM coverage. 
  2. On the other hand, good information backing up a compelling story can lead, in one transfer transaction, to your being able to de-risk, cut costs, and improve their SAM risk management all at the same time. 

We know of organizations who have achieved this trifecta. 

The successful risk managers were able to show how their organization and their SAM risk have changed, and therefore how their controls needed to change.  They were also able to show how they prioritized which controls to change, so the most effective and least expensive to implement were addressed ahead of others.  The organizations were (are!) more confident their SAM risk management is effective and were able to convince their insurers to trust that this was so.

Often, the first step in this process is to set the context by understanding how much SAM risk you have.  Our SAM risk calculator is a good place to start.

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