Manage Uninsurable Risk: Four Steps

Proactive risk management can help CUs mitigate or avoid this type of risk.

January 01, 2011
KEYWORDS management , risk
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Your vice president of lending unintentionally violates your credit union’s loan policies when granting some member business loans.

After many of the loans default, your credit union pursues collection activity—only to discover the members aren’t creditworthy and the loan officer was negligent.

What do you do?

This falls into the category of uninsurable risk, which isn’t covered by fidelity insurance.

Managing risk is extremely important for all credit unions, and insurance is just one way a credit union can protect itself. But not every exposure is insurable.

Therefore, a fidelity bond policy, which credit unions rely upon to cover losses from many risks, doesn’t cover all exposures. The good news is these risks can be mitigated or avoided entirely with proactive risk management policies and actions.

There are two risk types that can determine insurability under a fidelity bond: Pure risk and uninsurable risk.

Pure risk is unexpected and includes fraud and theft perpetrated against the credit union by another party. Pure risk may also include losses caused by employee theft.

These losses are generally insurable under a fidelity bond, as one of the core principles of insurable risk is that losses must be accidental, fortuitous, or outside the credit union's control.

Example: A credit union employee withdraws funds from a relative’s account and creates fictitious statements reflecting a balance that should be in the account. Fidelity bond insurance would cover this loss under “employee dishonesty” coverage.

Uninsurable risk

Conversely, uninsurable risk encompasses speculative risks, losses caused by vendors, indirect losses, and the losses of others. More specifically, this risk type can involve investment and loan risks, credit risk, deposit risk, and losses that credit unions create themselves.

Simply put, these are everyday business risks which are generally not covered by fidelity bond insurance.

It’s equally important to understand that fidelity bond insurance covers first-party losses (losses to the credit union), but does not always cover losses incurred by other parties. It’s also not intended to cover liability claims the credit union may face.

Here are four ways to manage uninsurable risks:

1. Identify the uninsured risk. Take a regular inventory of uninsurable risks and exposures your credit union faces and design a risk management plan addressing each risk. Use a process flowchart or functional analysis to map out hidden exposures.

2. Measure the uninsured risk. Determine the amount of risk in any given product or service by measuring loss frequency (number of overall losses) and loss severity (amount of each loss).

3. Implement loss controls. Build and implement loss controls based on identified risks and the measurements of each exposure. This will help you manage or, in some cases, eliminate these threats altogether. Tailor your risk management strategy by using a combination of tactics.

4. Manage the risk. Tracking your credit union’s losses to identify new trends will enable you to respond quickly and appropriately to new and unexpected losses. A comprehensive internal audit plan is an effective technique to identify and manage risk.

Insurance is only one method of risk control, and it’s unrealistic to expect it will cover all exposures. For additional risk management information to help avoid, reduce, prevent, and transfer risk, CUNA Mutual Bond policyholders can consult the Protection Resource Center.

ROGER NETTIE is staff underwriting specialist with CUNA Mutual Group Credit Union Protection. Contact him at 800-356-2644, ext. 7154.

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Great article! Unfortunately, most employees don’t feel valued or appreciated by their supervisors or employers. In fact, research has shown that the predominant reason team members quit their jobs is because they don’t feel valued. This is in spite of the fact that employee recognition programs have proliferated in the workplace – over 90% of all organizations in the U.S. has some form of employee recognition activities in place. But most employee recognition programs are viewed with skepticism and cynicism – because they aren’t viewed as being genuine in their communication of appreciation. Getting the “employee of the month” award, receiving a certificate of recognition, or a “Way to go, team!” email just don’t get the job done. How do you communicate authentic appreciation? We have found people have different ways that they want to be shown appreciation, and if you don’t communicate in the language of appreciation important to them, you essentially “miss the mark”. Additionally, employees need to receive recognition more than once a year at their performance review. Otherwise, they view the praise as “going through the motions”. A third component of authentic appreciation is that the communication has to be about them personally – not the department, not their group, but something they did. Finally, they have to believe that you mean what you say. How you treat them has to match the words you use. If you are not sure how your team members want to be shown appreciation, the Motivating By Appreciation Inventory (www.appreciationatwork.com/assess) will identify the language of appreciation and specific actions preferred by each employee. You then can create a group profile for your team, so everyone knows how to encourage one another. Remember, employees want to know that they are valued for what they contribute to the success of the organization. And communicating authentic appreciation in the ways they desire it can make the difference between keeping your quality team members or having a negative work environment that everyone wants to leave. Paul White, Ph.D., is the co-author of The 5 Languages of Appreciation in the Workplace with Dr. Gary Chapman.

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