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TRANSACTION RISK MANAGEMENT

Risk Managers, brokers, insurance companies and insurance buyers put most of their time and energy into dealing with the financial aspects of risk transfer: Insurance negotiations, Captive Insurance Companies, SIRs, Large Deductibles, Loss Sensitive Programs, Self-Insurance Programs, RRGs, Financial Guarantees, Finite Risk, Enterprise Risk Management, etc. We do not take issue with risk financing as a critical and appropriate focus of Risk Management (after all, we're Risk Managers).

However, what is all too often lost in the ongoing quest for more sophisticated and cost-effective risk financing is the simple and obvious fact that on a day-to-day basis business consists of a series of transactions. And what is so often and so inappropriately under-emphasized is the importance of controlling risk allocation at its source - in the contract that will ultimately determine the relative risk assumed by each of the parties to the transaction. Some companies are more contract driven than others, but almost every business invites major risk potential in its contractual arrangements:

  • Customer Contracts
  • Construction Contracts
  • Subcontractor Agreements
  • Professional Services Agreements
  • Equipment Leases
  • Company Mergers & Acquisitions
  • Vendor Agreements
  • Premises Leases
  • Product Acquisition Agreements
  • Facility Services Agreements
  • Shipping and Hauling Contracts
  • Professional Consulting Agreements

Transaction Risk Management contemplates the ability to (1) realistically assess the risk associated with a transaction, (2) understand the extent to which you can realistically rely on insurance to fund the risk you determine to accept, (3) negotiate with a realistic view of what is necessary to accomplish to achieve risk in proportion to benefit, and, (4) when appropriate, determine when to walk from the deal when the realistic assessment is risk out of proportion to benefit.

An enhanced focus on Transaction Risk Management / "Contract Control" is particularly appropriate in a hard market, when losses, especially those where the risk might be perceived as having been more contractually controllable, tend to have more adverse consequences. You don't want to give the underwriters any further reason to increase premiums and restrict coverage terms when your insurance budget has already been painfully increased. In a hard market companies also tend to increase the amount of risk they retain, so you will also likely be self-funding a greater amount of each loss.

To the extent you can be effective in controlling the risk you assume in your business agreements, you can not only improve your control over the risk your company ultimately incurs, but you can also improve your insurance negotiating position - effective Contract Control can be a valuable enhancement to your underwriting presentation.

Q: The subject is contracts - isn't this the domain of legal counsel?

Of course it is. Our role is to bridge the gap between Operations and Legal, and to serve as a unique resource to both. We do it every day, and we would be pleased to provide you with client and professional references who can comment on the value we can bring to you in the Transaction Risk Management area.

Risk Management Resources, Inc. | 952.944.8515 | info@RMRrisk.com