How to chart your risk course with a risk heat map

As a business leader, you deal with risks in your business every day. Inherently, you take steps to mitigate those risks. So, when you and your risk adviser conducted your most recent risk heat mapping session, did the process help you and your team prioritize your approach to managing your business risks? If you haven’t had such a session recently, please read on.

Smart Business spoke with Dereck M. Malzi, area assistant vice president at Arthur J. Gallagher & Co., about how risk heat maps work and why business leaders should take a fresh look at their organization’s risks through a different lens.

What exactly are risk heat maps?

A risk heat map plots risk points on a grid. The horizontal axis measures the impact of the risk, and the vertical axis measures the frequency of occurrence. If business leaders plot a risk close to the axis intersection — normally 0,0 in geometry — they believe that risk is not impactful and not likely to happen. The other extreme is the graph’s top right-hand corner, which plots risks that would be very impactful and very likely to occur.

riskmap_ajgOnce the scatter diagram is assembled, the map is color coded to identify risks as insurable, partially insurable and uninsurable in the traditional insurance marketplace (see simplified version to the right).

Risks to be plotted include traditionally insurable risks such as workers’ compensation and products liability, as well as other risks that may need attention prior to a catastrophic event. Examples include loss of a key customer or supplier, loss of reputation, loss of a license, copyright infringement and other risks you may be aware of and have learned to accept. Then there are the blind spots:

Risks not brought to your attention, such as recent regulatory changes in a territory that you do business but aren’t necessarily briefed on routinely. It can be somewhat surprising what is uncovered during the collaborative process.

Then the conversation shifts to what actions need to be taken to address those risks. Some can be transferred to insurance companies by endorsing a policy. Others can be transferred in a contract. Some can be engineered out of the business through training and some can be avoided with a change in strategic direction.

Why don’t businesses already do this and what is a risk adviser’s role in the process?

Risk heat mapping isn’t new, but many companies aren’t utilizing this tool. They may not be aware of it, feel too busy to bother with it or think it won’t help them.

That’s where a risk adviser plays an important role. He or she should guide you through a risk treatment and response plan, in order to avoid, prevent, reduce, transfer or retain the risk. The goal is to avoid surprises, spend your insurance dollars efficiently and utilize the most effective risk management tools at your disposal.

You may find yourself becoming more or less comfortable with a certain risk; but you will make an informed decision on the best way to deal with it. You don’t want to fall into the routine of automatically renewing the same basic insurance program on the theory that — ‘Well, it was good last year, it’s probably good this year.’

How long will it take to create a map?

If the right people are in the room for 90 minutes, you could end up with a good draft of a risk heat map. Then, it’s a matter of determining who is going to run with what and how to implement your action plan.

When is the best time to start the process?

There are two preferred times: (1) just before you start the insurance program renewal process. Typically, five months before renewal, you meet with your broker to talk about the insurance market and set a renewal strategy. If you back that up 30 days, you can start the conversation at 180 days with a risk heat map discussion. The map is then used to form your renewal strategies. By the time you renew your insurance, six months later, well thought out decisions inform your choices and you have specific action plans for dealing with your risks. Or (2), another good time would be a company retreat or strategic planning session with the executive team and/or board.

A risk heat map may confirm what you’re doing, save you from a blind spot or help you reprioritize your risk management plans. It’s a relatively small investment of time for the potential rewards you will discover.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.