Risk Management
Identifying and Treating the Loss Exposures of a Travel Company
The main purpose of risk management is to identify those areas in the operations of a business which, if ignored, will leave the entity exposed to serious financial loss. There are four basic steps to risk management:
- Identifying the problem,
- Selecting appropriate treatment,
- Evaluating the treatment, and
- Monitoring the selected program.
These responsibilities generally fall upon the shoulders of the owner and/or manager of a firm, as most companies do not have the resources to employ their own Risk Manager. This holds true of most travel agencies and tour companies.
Let's detail the four processes outlined above. In doing so we will begin to see how, by combining loss control measures, insurance, risk transfers and planned retention, a travel company can successfully meet its risk management objectives.
Step #1: Identifying the Problem - Identification is the first step in any Risk Management Program. If an exposure is not recognized, then it may be unconsciously retained. This is particularly important in the area of Professional Liability which may involve bodily injury and even wrongful death suits alleging negligence on the part of the agent in failing to properly advise clients regarding the sometimes inherent dangers of travel.
Identifying all loss exposures should be an ongoing process, since conditions affecting the business environment are ever changing. For example, although a retail agency may not operate its own tours today, if a business opportunity presented itself tomorrow, the situation could quickly change.
In identifying current and any potential new exposures, a travel agency manager should rely on the advice of as many professionals as possible, such as attorneys, accountants, insurance brokers and trade associations.
Step #2: Selecting Appropriate Treatment - This aspect of risk management involves those four treatments mentioned earlier: Loss Control, Insurance Protection, Risk Transfers, and Planned Retention. Most companies use a combination of all four treatments in their risk management programs.
Loss Control - These are measures which can be taken to reduce the frequency and severity of losses.
There are a number of loss control methods available to Travel Agents and Tour Operators. Some of these measures include: screening and selection of suppliers, wording of brochures, disclosure of principals, offering of travel insurance, client refunds, written contracts, care and treatment of minors, care of baggage and belongings, and handling of potential liability claims.
Insurance Protection - Among the Liability-related insurance products available to Travel Agents and Tour Operators are:
Professional Liability Insurance - Many different types exist, however, experts often recommend that a Professional Liability product offer separate and distinct coverages for Bodily Injury and Property Damage, (including specific mention of "non-owned" and "hired" automobile coverage), Errors and Omissions, and Personal Injury. The policy should clearly state that all of the travel operations of the insured company are covered, as opposed to specifying just a portion, or excluding certain operations. This comprehensive approach can help to eliminate potential gaps in coverage.
Workers Compensation & Employer's Liability - Available through private insurers or state funds, these products compensate employees for job related accidents or illness and protect employers against claims for which they are held legally liable.
Commercial Auto Liability Coverage - For owned and leased/hired vehicles.
Directors & Officers Liability Insurance - Protects against claims from stockholders, partners, and employees, competitors, creditors & regulatory agencies.
Umbrella Liability Coverage - Provides excess limits over existing liability coverages, and primary coverage for some areas not covered by underlying insurance.
Risk Transfers - When a company transfers an exposure, or the financial responsibility associated with that exposure, they are said to be "transferring risk." That is, the consequences of the exposure are passed to another, and/or the activity related to or causing the exposure is transferred to another.
Insurance is a perfect example of the first type of risk transfer. With insurance, the financial consequences of the loss are transferred from the insured to the insurer. Other examples of this type of risk transfer are disclaimers and hold harmless agreements.
An example of the second type of risk transfer, in which the activity itself is transferred to another party, might involve a tour company electing to contract with a bus company for transport of its clients. Rather than use its own buses, which might be in disrepair, a portion of the risk is transferred to the bus company. Of course, this scenario might bring about contingent liability if, for example, the tour operator was negligent in failing to determine that the bus company was properly insured.
The main objective of any transfer should be to place the financial responsibility with the party which has the most control over the activity, or with an insurer who is familiar with the risk.
Planned Retention - The last category of exposure treatment is planned retention. Note the emphasis on planned! Unconscious retention results when the Risk Management process has failed to identify a loss exposure. Because not all losses can be avoided by using loss control measures, insurance, or risk transfers, retention will consequently affect all companies. The focus, then should be on determining how much of a retention level can be absorbed. This would be governed by the availability of resources to fund the retentions and the limit to which losses can be forecasted.
How is retention accomplished? Two of the most common forms of retention are insurance deductibles and a self insured retention or S.I.R.
A deductible is simply the amount an insured is required to contribute toward a paid claim. The SIR differs from a deductible in that it generally uses Excess Insurance Coverage as the top layer of protection and retains the primary layer. This method is commonly employed by Group Health Insurance programs in which a company retains a certain limit of coverage per employee and maintains an excess Major Medical Policy for the second layer of protection.
Liability exposures are more difficult to forecast than those associated with property. It's virtually impossible to set a limit on the potential liability associated with vehicular accidents (whether owned or non-owned vehicles are involved), premises operations, or the broad array of professional operations and their related exposures. This contrasts with more predictable "maximum possible losses" associated with property exposures.
Steps 3 & 4: Evaluating & Monitoring the Selected Treatments - In evaluating which treatments should be used, a travel company must consider not only the effectiveness of that treatment, keeping in mind which ones are required by law, but the true cost of that treatment. A value should be added for the "peace of mind" which comes from knowing that an exposure will be handled by an insurer in the event of a loss.
The process of evaluating any Risk Management program should be ongoing. Conditions are always changing in any travel business - fees, tour products, airfares, client refund procedures, employees, new contracts and leasing agreements... the list is endless! For a Risk Management program to be effective, it must be constantly monitored.
Owners can rely on many resources to help them achieve the ultimate objective of any company - to increase the "bottom line".
Understanding risks and learning how to minimize their impact on the financial well-being of your travel company should be the ultimate Risk Management objective. w
Sources: Principles of Risk Management and Insurance., Vol. I, II. American Institute for Property and Liability Underwriters, 2nd Ed. 1981.
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