The Bottom Line - Banking on Risk Management
Banking On Risk Management
From our business to yours: the essentials of managing and mitigating risks
Risk is an inherent part of every business endeavor. It lurks quietly in the background of every transaction. And though it’s not always the most pressing topic to discuss, it is one of the most important. Whether you’re a startup, a small business or a multinational corporation, navigating risk – skillfully – is critical for sustained success.
In fact, managing and mitigating risks effectively can be the difference between flourishing or faltering, winning or losing and surviving or surrendering.
We think about risk – or asset protection – daily in our business, and that’s likely one of the key reasons you bank with us: to lower the transactional risks that you and your assets are exposed to every day. In the spirit of keeping you informed and vigilant, here are some reminders on the topic, no matter the size, stage or industry focus of your company.
Understanding risk. Identifying and fully comprehending the types of risks a business might face is vital. They can range from financial and operational to strategic and compliance-related. Financial risks include market/rate volatility or economic downturns, while operational risks encompass supply chain disruptions or IT failures. Strategic risks involve shifts in consumer behavior or industry trends, while compliance risks revolve around legal and regulatory changes.
In banking, we study and track all of the above, however we focus a lot of our attention on risks associated with financial fraud and transactional risk. They are a bigger focus to us as we see the daily threats to our client’s businesses in our position as their trusted advisor. You may have a few that are more heavily weighted in your industry such as risks related to transportation, manufacturing equipment or inventory.
No matter what assets you may be seeking to protect – your people, your customers, your products or your cash – make sure you account for the risks that could threaten or interrupt them.
Risk assessment. Conducting regular and thorough risk assessments is the cornerstone of effective risk management. Identifying and prioritizing potential risks allows you to appropriately allocate time and resources to most effectively address the threats. Utilize tools such as a risk control matrix or scenario planning to foresee potential pitfalls and devise preemptive strategies. Tabletop exercises mimicking threat scenarios are an effective way to identify potential weaknesses in your risk mitigation plans. Keep in mind that you must pick your battles by prioritizing threats since you cannot account for every risk. Create a concept of “core risk”: those elements central to your success (or failure) such as revenues, expenses, physical assets or intellectual capital and property.
Develop risk mitigation strategies. Once your priority of risks and their respective financial or operational exposures are identified, you must develop robust mitigation strategies. This might involve investing in additional insurance, training, technology, HR consulting, or legal representation. Make sure you have contingency plans already in place, as well as the expert resources and tools to help mitigate or eliminate the most severe risks. Trying to find the right experts and tools in the middle of a crisis will take time, and it will needlessly drain the focus and other critical resources needed to respond to the threat.
Regular monitoring and modification. Risk management is not a one-time task; it’s an ongoing process. Think of it as daily “risk hygiene” as opposed to an annual trip to the risk doctor. This involves staying updated on industry trends, regulatory changes and technological advancements that might impact your business landscape.
Foster a culture of risk management. Risk management is everyone’s job. Encouraging all stakeholders, from employees to top-level management, to actively participate in risk management fosters a holistic approach. Create forums for open communication where potential risks can be discussed and addressed collaboratively. Associates on the front lines often have unique insights into operational risks and their input can be invaluable. And spend time focusing on your clients’ risks; that process will not only make you a better and more invaluable partner to your clients, but will also give you insights into your own risks.
Managing and mitigating risks is not just a necessity – it’s a strategic advantage when done well. And it doesn’t just protect assets, but also people, livelihoods, reputations, and legacies.
Thank you for letting us be part of your risk management infrastructure. We look forward to helping you protect your assets for many years to come.
— Timothy J.Thompson, General Counsel, Country Club Bank — Member FDIC
Economic Insights
Cooling inflation means Fed rate hikes are likely finished
Consumer prices overall were flat last month vs. the prior month and rose only 3.2% from a year earlier, a slower pace than in September (3.7%), maintaining a decline that likely removes the possibility of any more rate hikes this year.
Stock and bond markets have so far welcomed the news with broad rallies that seemed to indicate investors are confident that historic interest-rate increases have ceased for now, and may even begin to come down by mid-2024.
Increases in so-called core prices, which exclude volatile food and energy items, showed underlying price pressures are abating with core inflation falling to 4.0% in October vs 4.1% in September, and 4.3% in August.
Our expectation would be for core inflation to continue this glide path lower as shelter (which represents 40%+ of core inflation) continues to slow from its October 6.7% rate (down from 7.2% in September and 7.3% in August) towards a low single digits rate by this summer.
The U.S. gross domestic product - the total output of goods and services – was also projected to grow at a more modest rate in the fourth quarter, further allaying fears of increased price pressures. The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2023 is 2.0 percent as of November 17, down from 2.2 percent on November 15.
With GDP growth in check, and unemployment ticking up slightly (3.6% to 3.9%) the runway for the so-called soft landing (with no recession) appears to be in sight.
Bottom Line: In October’s survey, the average forecast of economists was for no recession, a stark contrast to the consensus six months prior when economists predicted the economy would enter a recession within the following 12 months.
The probability of a recession appears to have dropped even further as indicated by the recent sharp rise of stocks and the decline in Treasury bond yields.
Caution is still warranted, however. Inflation hasn’t made it all the way back to the Fed’s target rate of 2%. The economy may also still face headwinds with the delayed impact of higher interest rates.
Finally, American consumer spending has buoyed the economy nicely for some time, but that may be slowing as well, as retail sales fell in October for the first time since March. Major retailers like Home Depot and Target have reported softer same store sales of late, so it will be interesting to see what Christmas brings, and not just for them, but for all of us. Early indications are that the holiday season is off to a solid start with Black Friday online sales +7.5% from a year ago and reaching a record $9.8B.
— Marcus Scott, CFA, CFP®, Chief Investment Officer (CIO) for Country Club Trust Company
CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.
Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it authorizes use of by individuals who successfully complete CFP Board's initial and ongoing certification requirements.
The opinions and views expressed herein are those of the author and do not necessarily reflect those of Country Club Trust Company, a division of Country Club Bank, or any affiliate thereof. Information provided is for illustrative and discussion purposes only; should not be considered a recommendation; and is subject to change. Some information provided above may be obtained from outside sources believed to be reliable, but no representation is made as to its accuracy or completeness. Please note that investments involve risk, and that past performance does not guarantee future results.
Commercial Insurance Insights
Insuring your success: the essentials of scoping and buying commercial insurance
Commercial insurance is a crucial element in safeguarding against risks and uncertainties that can threaten the ongoing operation of your business. Whether it be for people, property, or other protections, it needs to be tailored to fit the needs, risks, and financial requirements of your business, while still remaining adequate and affordable.
We recently spoke with Joe Agnello, CEO of the Founders Series at Lockton and a 30-year commercial insurance veteran, to discuss the finer points of commercial insurance and how he and his team focus on aligning with a client’s corporate initiatives while serving as a value-add partner in exploring innovative program structures. Here are the fundamentals to keep in mind when selecting and buying insurance for your business.
Assess Your Business Needs – And Risks
The first step in commercial insurance buying is reviewing and understanding the unique needs of your business. This involves a comprehensive assessment of potential risks, such as property damage, liability claims, cyber threats, or natural disasters. Consider the industry you operate in, the size of your business, number of employees, and the specific activities or services you provide, including the insurance requirements your customers are likely to request as a condition of doing business. You must also take into account federal and state regulations, as well as any loan terms that require coverage.
Focus your thinking on finite risk – the direct loss of physical assets rather than the more infinite costs of third-party injury or financial losses if you provide a professional service.
What can I afford to self-insure? Rule of thumb – don’t insure what you can afford to replace.
Understand Underwriting and Costs
Carriers look at how you manage risk in general through interviews and physical inspections. They want to know if your property is in good order, well lit, and secure? Do you have good hiring and safety practices in place? Do you manage your contractual risk, so you are not taking on the liability of others?
The more you do to help mitigate risk by having solid practices in place the better you look to the insurance carrier market. Of course, not all risk can be managed away so working with safety experts in your industry can help you find mitigation tools, such as strong cyber security practices including dual authentication, fire and water detection systems, alarms, backup power, and alerts for changes in temperature and other critical operating systems.
Insurance costs can vary widely depending on carriers and conditions for loans or buy/sell agreements. And be sure to secure solid quotes early in a buy/sell situation or large transaction, so those expenses can be accurately factored in for profit/loss pro formas. Late or inaccurate insurance expense estimates can kill or delay a deal closing if they’re outside of expected ranges and estimates.
Once you've scoped your needs and explored available options, compare quotes and consider not just the cost but also the coverage limits, deductibles, and the reputation and reliability of the insurance provider.
The Essential Coverages
Once you've identified your assets, risks, and mitigation tactics, it's time to select coverage. There’s insurance for everything, but these policies are the most common:
General Liability Insurance: Protects against claims of bodily injury or property damage to third parties.
Property Insurance: Covers damage or loss of physical assets, including buildings, equipment, and inventory.
Commercial Auto Insurance: Specifically for vehicles used for business purposes, safeguarding against accidents and liabilities.
Workers' Compensation: Provides coverage for work-related injuries or illnesses suffered by employees.
Cyber Liability Insurance: Protects against data breaches and cyber threats that can compromise sensitive information.
Professional Liability Insurance: Essential for service-based businesses, covering errors, negligence, or malpractice claims.
Knowing what is covered is important, but knowing what is not covered is equally important. It’s a mistake to think any policy will cover every aspect of your business and you need to understand exclusions in order to put additional risk management strategies in place. Read your policy, ask questions, and negotiate where necessary.
Get Professional Guidance
Navigating the complexities of commercial insurance can be daunting, and the expertise of an experienced insurance professional can be immensely beneficial. These experts help assess your needs accurately, explain policy terms, compare different options, and negotiate the best deals for your business.
A good broker listens, asks questions, and should act as a trusted advisor and advocate. Use the same care and vetting process to hire your insurance broker as you would to hire an accountant or attorney.
Open, honest and frequent communication are the sign of a healthy broker-client relationship, with both parties alerting each other about changes in the business as well as the insurance programs.
Commercial insurance is one of the most important pillars of your overall risk management strategy. It should provide peace of mind, but more importantly it should provide protection against the unpredictable. By carefully scoping your needs, understanding available coverage options, and seeking expert advice, you can mitigate risks and ensure your business is well-protected and ready for whatever opportunities – or challenges – may come.
Managing People Risk
Understanding the value of your key people — and how to manage the risk of death or disability
Certain individuals often play a pivotal role in shaping a company's success. These key persons, often executives or individuals with specialized skills, knowledge, or influence, are the linchpin of a company's operations.
The unexpected absence or loss of such individuals can have a serious impact on the business, disrupting operations, jeopardizing financial stability, and even putting at risk the continuity of the business.
This is where key person life and disability insurance can be a crucial risk management tool. Key person insurance is exactly what it sounds like – a life or disability income policy that safeguards a business against the financial repercussions resulting from the incapacitation, disability, or death of key individuals within an organization.
It’s important to consider the value of key people in any company. They might possess irreplaceable expertise, hold crucial relationships with clients or partners, or be instrumental in driving innovation and revenue generation. Losing them could lead to various challenges, including:
Financial Instability: The loss of a key person might lead to decreased revenue, increased expenses due to recruitment and training of replacements, and potential loss of crucial contracts or clients.
Operational Disruption: The loss could cause disruption in ongoing projects, delays in decision-making, and a decline in overall productivity.
Loss of Reputation: Key individuals often contribute significantly to a company's reputation. Losing them unexpectedly could tarnish the brand image and erode customer confidence.
Key person insurance mitigates these risks by providing financial support to the company in the event of the covered individual's unforeseen death or inability to work any longer. The policy typically offers coverage for lost revenue and profit opportunities, and increased expenses such as recruiting and training of replacements
It's essential to note that the cost and terms of key person insurance can vary based on factors such as the individual's age, health, role within the company, and the coverage amount desired. Insurance professionals or financial advisors can assist in tailoring a policy that best suits the company's needs and financial capabilities.
Managing overall risk for any business is crucial, and key person insurance directly protects the heart of a company – its key individuals. By proactively securing coverage for pivotal players in your business, you fortify your resilience against uncertainties that may arise, ensuring financial continuity and stability that give you the needed time and resources to assess your business situation carefully, and fulfill your team needs accordingly.
Want to find out more about key person insurance? Click here to get in touch with Wheatland Advisors, our wholly-owned subsidiary focused on life insurance solutions for businesses and individuals.
M&A Insights
How To Advise Clients on Unsolicited Offers
M&A volume and valuations have moved closer to reality in recent months, but the capital available to execute M&A transactions remains elevated. This is a function of private equity funds needing to deploy capital and the pursuit of growth and market share by strategic buyers with cash on their balance sheets.
With increased competition, more buyers are reaching out to potential acquisition targets directly in hopes of bypassing a competitive auction process. So how does an advisor respond when clients ask: “What should I do? Do the terms and value presented reflect current market conditions? Is the group behind the letter the best buyer?”
CC Capital Advisors has advised clients on 100+ mergers & acquisitions, capital raising, and strategic advisory transactions totaling over $2.5 billion. Read the invaluable nuggets gleaned from the years of counseling sellers when it comes to unsolicited offers. And discover some compelling strategic insights that can benefit anyone seeking to optimize the sale of their business. Read the post, now.
CC Capital Advisors, Inc. is a subsidiary of Country Club Bank. Not FDIC Insured-No Bank Guaranteed-May Lose Value Member FINRA, SIPC
Banking on KC
George Guastello of Union Station: The significance of the Ramón Murguía Visitor Entrance
Union Station has stood for nearly 110 years as a crossroads for the diverse cultures of our city. Recently, the beloved KC institution unveiled the Ramón Murguía Visitor Entrance at Union Station, named in honor of the Country Club Bank distinguished board member.
Banking on KC Podcast’s Kelly Scanlon sat down with George Guastello – president and CEO of Union Station – to discuss the striking entrance that creates a symbol of unity and prosperity for all. Listen to the podcast now to learn everything from the genesis of the project to how it is inspiring the multiple generations that pass through the entrance.
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