Still it’s not surprising that many ski area people associate risk management with litigation avoidance. Since the precedent setting Sunday versus Stratton case, the ski industry has worked hard to protect itself from the spurious law suits that occur each season. Everybody has become aware of what to do in case of a suit, or even better, how to keep from getting sued in the first place. The result is that ski areas are no longer sitting ducks for plaintiff’s attorneys. Good risk management practices worked.
But, if that’s only 25 percent of the problem, how much more money could the ski industry have banked if the other 75 percent of risk management had been put into practice industry-wide?
Risk management professionals generally agree that loss exposures (risk) falls into four categories: 1) property loss, 2) personnel loss, 3) liability loss, and 4) net income loss. In some instances, a loss is a combination of two or more of these categories. For example, at a snowmaking-dependent area, the building housing the compressors could burn down (a property loss), thereby disabling the system. This loss prevents opening for Christmas and precipitates a net income loss.
While it’s true that some ski area operators have excellent and comprehensive risk management programs — I know of one area with a department of 14 people handling risk management and benefits — many ski areas relegate non-litigation risk management concerns to someone as a collateral duty. Some simply buy insurance and hope for the best. While this approach is an expensive business practice, it has sufficed for some areas.
In light of skyrocketing medical and workers’ compensation costs, soaring building costs and high interest rates, there is a better approach. Risks can be managed, areas of potential loss can be analyzed and action can be taken to prevent, or at least minimize, loss.
The basic principles of risk management are straight forward and relatively simple. They fall into seven steps:
- Look around your area and list the assets. Then ask the question: “What could happen that would cause a reduction of these assets?” Be thorough, objective and honest.
- Next, ask the difficult question: “Assuming the event which could cause a loss occurred, how would it affect us (the company, department, etc.)?” This question is difficult because there is a tendency to be less than objective when assigning damage and an almost uncontrollable urge to mitigate losses.
- The third step is an easy question: “Can we stand the loss?” If the answer is “yes,” the peril may be considered as a candidate for risk retention or, “We’ll take our chances!” If the answer is “no,” then further action is necessary.
- The fourth question then becomes: “What can we do to prevent or reduce the loss?” At this point, creativity is important and tunnel vision is to be avoided. For any given risk, there are usually several (sometimes many) solutions, but not all of them are palatable or acceptable. Each corrective alternative must be evaluated for its advantages and disadvantages. The tests of cost, suitability, feasibility, desirability, effectiveness plus a plethora of other site-specific challenges must be applied to each alternative.
- The fifth, and often most vexing, challenge is to select the best course(s) of action to prevent or mitigate the loss. This is vexing because usually there are no perfect solutions, only compromises. Selection of the best alternative may be selection of the least-bad alternative. It is important to remember, if the risk is too great to be safely retained, then action is mandated.
- The sixth step is straightforward: implement the chosen course of action. Take the steps necessary to put the chosen alternative to work.
- The seventh step is the most important in the risk management process and also the one often missed: evaluate the effect of the implemented action. Is the selected alternative working as advertised? If not, then the risk is still there and the unendurable loss is still a possibility.
Too often, managers will faithfully follow the risk management steps right up through the implementation phase and then fail to utilize some form of evaluation to see if the feared loss is really prevented or reduced. If the first six steps of risk management have been followed, the chances are good the risk has been managed. But sometimes the selected corrective action may be less effective than anticipated and another alternative must be initiated.
Sometimes, the identified loss is both unacceptable and very difficult to manage with any degree of confidence. In this case, a risk management alternative may be to transfer the risk. That is, let some other entity assume the risk. Two common methods of risk transfers are insurance and concession. For example, it is practically impossible to predict a catastrophic lift failure; therefore, insurance is mandated. A ski area owner can usually avoid rental shop liability if he leases out the rental business to a concessionaire who pays a fee for operating it and thereby assumes the risk of liability.
When to retain the risk, transfer the risk by concession or insure against the loss is obviously a business decision that must be decided when examining the risk management alternatives.
Suggestions on the financing of risk and how to select the best alternative is beyond the scope of this article, but these risk management concepts are excellent steps for assisting ski area operators in making business decisions. It is no longer practical for the operator, regardless of the size, to trust to luck and circumstance. Good management of risk is as much a part of a successful business operation as good personnel, good judgment and good accounting.
