Risk Management

Risk Management in the Sharing Economy

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Author:

Randall Davis

Randall Davis

When asked to share a professional passion, Randall responds without hesitation: “Getting to the truth,” “Solving difficult problems,” “Teaming with smart people,” and “Challenging the corporate status quo.” Randall joined Risk International in 2002 and oversees its risk management practice. He’s smart and serious when it comes to risk strategy, insurance program optimization, quantitative modeling, competitive and organizational dynamics, business continuity planning, and enterprise risk management (ERM). And he’s rock-solid when it comes to delivering value to clients, having achieved an average return on investment of more than 1200% for them.

Randall Davis

At the end of 2015, the Oxford English Dictionary released its list of words of the year. Although the actual winner was not even a word (it was an emoji), what got my attention was one of the runners up: “sharing economy.”

Oxford defines the sharing economy as: “An economic system in which assets or services are shared between private individuals, either for free or for a fee, typically by means of the Internet.” What occurred to me was the connection between the newly named sharing economy becoming popular (such as UBER and Airbnb) and the age-old concept of shared ownership or shared services. Despite all of the press suggesting that this is something new, the fact is that humans have been sharing ownership and services for millennia. Consider the idea of a roadside inn. That is an old example of shared services. Or how about the creation of the concept of insurance? An early example of insurance was created in the coffeehouses of London as merchants looked to share in the “ownership” of a loss. Insurance at its core is all about a shared service.

What is relatively new is the concept of outsourcing, particularly the outsourcing of certain business functions. Applying this to my business, the concept of outsourced risk management has only been around for 30 years or so. But at its core are the benefits that come from a shared service: the same (or better) utility of an owned service for much less cost.

Hazard risk management isn’t necessarily a full-time job in most companies, particularly not for those with sales under $5 billion. We often see when first engaged to take over a previously home-grown risk management department, that the incumbents were doing everything they could to appear busy, such as insisting on paper-based work environments, spreading out insurance renewal dates, engaging multiple brokers or other vendors, needlessly complicating risk management business processes, and tightly controlling information and access to risk management training to protect their “turf.”

We’ve found over the last 30 years that the typical risk management needs of even large multinational corporations can greatly benefit from sharing the service of risk management expertise. Such benefits include not only cost savings on direct department expenses, but also:

  • Access to specific expertise only when needed.
    • It’s difficult, if not impossible, these days to find a Risk Manager with the wide variety of expertise needed to service a large company. By sharing access to dozens of experts, the company gets a composite expert not available any other way.
  • Service provided by experts with far wider experience than even the most experienced corporate risk manager.
    • Consider a young Risk International Risk Analyst that may be exposed to 15 annual insurance program renewals in a single year. They will have dealt with issues that would take the typical Risk Manager with one annual renewal 15 years to accomplish.
  • Deeper expertise and service sharing leads to better results.
    • Brokers and other vendors are more likely to work hard for great results knowing that the Risk Manager has already gone through several other renewals with their competitors.
    • Insurers also provide better service and underwriting as they can see how to leverage a single relationship with us into more business. Consider that Risk International was responsible for over $60 billion of insurance transactions in 2014 alone.
  • Shared Risk Management is far more flexible.
    • It allows for customized deployment of resources. As the business changes, different aspects of risk management become important at different times.
    • As the business grows or shrinks, the department can easily change to match its needs.

These are just a few of the benefits, but consider that in the long run, well managed risk simply costs far less, and most companies are not equipped to dedicate the resources necessary to achieve these savings.

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