Experts sometimes use the term risk mitigation process to describe how organizations identify, assess, and prepare to lessen or mitigate risks. More often, experts use the term risk management to describe that work.
Here are the seven basic steps of the risk management process:
Download a Sample Business Risk Response Plan for Excel | Microsoft Word
Download this completed example business risk response plan that can help your team understand how to write a risk response plan for your organization. This plan includes sample data, with components such as include risk, risk severity, description of mitigation plans for that risk, and if and how those mitigation plans are working. Use this template as a starting point, and customize it to create your own business risk response plan.
Teams can assess business risks by department, such as operations or sales. They can also assess them by broad categories, such as technical risks or compliance risks. This will help organizations avoid costly oversights during risk mitigation.
Organizations might assess risk in various departments, such as the following:
They might also assess risks in broader, thematic areas. Those areas might include:
Your team might also consider doing what is called a PESTLE analysis . In this analysis, your team considers the overall business environment and potential risk in six areas: political, economic, social, technological, environmental, and legal.
Tip: You might see this type of analysis written as a PESTEL analysis . Both acronyms indicate the same six areas but are written in a different order.
Download a PESTLE Analysis Template Excel | Microsoft Word
Download this template to help guide you through a PESTLE analysis. This analysis helps your team focus on and think about risks to the business in six broad areas. Use the empty columns to list potential risks to your organization in each category and summarize your risk mitigation plan.
A variety of tools are available to help your team assess and mitigate risks. These include risk management plans and assessments. Many companies also use risk assessment frameworks (RAFs), which specifically measure IT risks.
These are some tools that can help all companies with risk management and risk mitigation:
These are some common RAFs that IT experts use:
A risk mitigation plan might include a contingency reserve or contingency. While the risk mitigation plan includes many elements, the contingency is simply a reserve of funds, time, or other resources that can help mitigate certain risks.
Risk mitigation is one part of the entire risk management process. When your organization performs risk management, it will perform risk assessments that might call for risk mitigation.
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Tallat Mahmood
5 min. read
Updated October 25, 2023
One of the areas constantly dismissed by business owners in their business plan is an articulation of the risks in the business.
This either suggests you don’t believe there to be any risks in your business (not true), or are intentionally avoiding disclosing them.
Either way, it is not the best start to have with a potential funding partner. In fact, by dismissing the risks in your business, you actually make the job of a lender or investor that much more difficult.
Funding businesses is all about risk and reward.
Whether it’s a lender or an investor, their key concern will be trying to balance the risks inherent in your business, versus the likelihood of a reward, typically increasing business value. An imbalance occurs when entrepreneurs talk extensively about the opportunities inherent in their business, but ignore the risks.
The fact is, all funders understand that risks exist in every business. This is just a fact of running a business. There are risks that exist with your products, customers, suppliers, and your team. From a funder’s perspective, it is important to understand the nature and size of risks that exist.
Firstly, they want to understand whether or not the key risks in your business are so fundamental to the investment proposition that it would prevent them from funding you.
Some businesses are not at the right stage to receive external funding and placate funder concerns. These businesses are best off dealing with key risk factors prior to seeking funding.
The second reason why lenders and investors want to understand the risk in your business is so that they can structure a funding package that works best overall, despite the risk.
In my experience, this is an opportunity that many business owners are wasting, as they are not giving funders an opportunity to structure deals suitable for them.
Assume your business is seeking equity funding, but has a key management role that needs to be filled. This could be a key business risk for a funder.
Highlighting this risk shows that you are aware of the appointment need, and are putting plans in place to help with this key recruit. An investor may reasonably decide to proceed with funding, but the funding will be released in stages. Some will be released immediately and the remainder will be after the key position has been filled.
The benefit of highlighting your risks is that it demonstrates to investors that you understand the danger the risks pose to your company, and are aware that it needs to be dealt with. This allows for a frank discussion to take place, which is more difficult to do if you don’t acknowledge this as a problem in the first place.
Ultimately, the starting point for most funders is that they want to invest in you, and want to validate their initial interest in you.
Highlighting your business risks will allow the funder to get to the nub of the problem, and give them a better idea of how they may structure their investment in order to make it work for both parties. If they are unsure of the risks or cannot get clear explanations from the team, it is unlikely they will be forthcoming when it comes to finding ways to make a potential deal work.
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The main reason many business owners don’t talk about business risks with potential funders is because they don’t want to highlight the weaknesses in their business.
This is a fair concern to have. However, there is a right way to address business risk with funders, without turning lenders and investors off.
The solution is to focus on how you mitigate the risks.
In other words, what are the steps you are taking in your business as a direct reaction to the risks that you have identified? This is very powerful in easing funder fears, and in positioning you as someone who has a handle on their business.
For example, if a business risk you had identified was a high level of customer concentration, then a suitable mitigation plan would be to market your products or services targeting new clients, as opposed to focusing all efforts on one client.
Having net profit margins that are lower than average for your market would raise eyebrows and be considered a risk. In this instance, you could demonstrate to funders the steps you are putting in place over a period of time to help increase those margins to at least market norms for your niche.
The process of highlighting risks—and, more importantly, outlining key mitigating actions—not only demonstrates honesty, but also a leadership quality in solving the problems in your business. Lenders and investors want to see both traits.
Any lender or investor backs the leadership team of a business first, and the business itself second.
This is because they realize that it is you, the management team, who will ultimately deliver value and grow the business for the benefit for all. As such, it is imperative that they have the right impression about you.
The consequence of highlighting business risks in your business plan with mitigations is that it provides funders a real insight into you as a business leader. It demonstrates that not only do you have an understanding of their need to understand risk in your business, but you also appreciate that minimizing that risk is your job.
This will have a massive impact on your credibility as a business owner and management team. This impact is more acute when compared to the hundreds of businesses they will meet that omit discussing the risks in their business.
The fact is, funders have seen enough businesses and business plans in all sectors to instinctively know what risks to expect. It’s just more telling if they hear it from you first.
Funders rely on you to deliver on your inherent promise to add value to your business for all stakeholders. The weight of this promise becomes much stronger if they can believe in the character of the team, and that comes from your credibility.
A business plan that discusses business risks and mitigations is a much more complete plan, and will increase your chances of securing funding.
Not only that, but highlighting the risks your business faces also has a long-term impact on your character and credibility as a business leader.
Tallat Mahmood is founder of The Smart Business Plan Academy, his flagship online course on building powerful business plans for small and medium-sized businesses to help them grow and raise capital. Tallat has worked for over 10 years as a small and medium-sized business advisor and investor, and in this period has helped dozens of businesses raise hundreds of millions of dollars for growth. He has also worked as an investor and sat on boards of companies.
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What is meant by strategic risk? Strategic risk examples encompass many different risks — and depending on the nature of your business, you may face any or all of them. Understanding the types of strategic risk you face is fundamental to your ability to tackle them as part of your broader governance, risk and compliance (GRC) strategy.
Whether you are a chief risk officer and strategic risk falls firmly within your orbit, or whether as CFO, CEO or general counsel, you take more holistic responsibility for your organization's risk strategy. Understanding and mitigating risk at a strategic level will be a priority.
In today's hyper-connected world, the risk evolves faster than businesses can devise strategies to tackle it. Being familiar with different strategic risk examples can help you get ahead of the curve, helping you identify the types of strategic risk your organization faces and the tactics you can put in place to respond.
'Strategic risk' is a term that's often bandied about. But what does the phrase mean in practice? What types of risk are defined as 'strategic?' How do you identify strategic risks? What are the examples of strategic risks you might face in your organization? What are the types of strategic risk you should prioritize in your risk mitigation strategy?
Strategic risk is a category of risk; alongside operational, financial, regulatory and other business risks, it forms part of the umbrella of risks your organization faces.
When we look at strategic risk examples, they are generally defined as those that threaten a business's ability to set and implement its chosen strategy.
They may be external; events like the Covid-19 pandemic are the perfect example here.
They may be 'self-inflicted,' brought about via an organization's own strategy and decision-making. An example of this would be the accelerating digital transformation of businesses, which has delivered many positives but has also exposed new types of risk.
Regulatory and legislative drivers relating to governance, risk and compliance strategies more generally are also prompting businesses to focus on strategic risk. At the same time, a spotlight has been thrown on strategic risk via growing awareness of the close ties between risk, compliance and business value .
This evolution of risk has led organizations to try and bring some structure to their mitigation strategies by categorizing and prioritizing the risks they face. Let's look at some of the examples of strategic risks you might face.
Some sources distill strategic risks into five types, sometimes called the 'five sources of strategic risk.' However, these aren't always consistent, however, look up several different sources, and you will find a variety of risks listed among the 'five types.'
Our list of strategic risk examples below therefore includes more than five.
Among the types of strategic risk you should have on your radar are:
Many of these examples of strategic risk are inter-connected. For instance, if you face operational risks around the efficacy and rigor of your processes, this is likely to expose you to financial or regulatory risk. Similarly, if you fail to tackle governance risks, you may well encounter reputational risk.
The intertwined nature of the types of strategic risk emphasizes how important it is to take an integrated approach to address them.
Amongst all these strategic risk examples, there are positives. The linkages that cause one risk to increase the chances of another can also work to your advantage. Take a coordinated, integrated stance on one aspect of strategic risk, and your performance in others should also improve. As companies refine their approaches to risk mitigation, they become better able to recognize these connections. As a result, they can approach risk strategically, capitalizing on synergies for a more robust result.
Below we also set out some specific tips that can help you tackle the different strategic risk examples:
Hopefully, this article has given you a deeper understanding of the types of strategic risk you face, some examples of strategic risk that bring this to life. It has also provided insights into how you can tackle different strategic risks.
Remaining on the front foot in terms of upcoming legislation, economic trends and governance best practice can really make the difference — amplifying your ability to be leverage strategic and proactive in the face of changing risks.
The business landscape is constantly evolving. Stay ahead of the curve with insights from Renee Murphy , a recognized leader in the governance, risk, and compliance (GRC) space. Leveraging her 10 years of expertise at Forrester, this blog post dives deep into 9 real-world examples of strategic risks businesses face today. Learn how to identify, assess, and mitigate these threats to ensure your company's continued success.
Read the four-minute article now here: Risk in 2024 — 7 steps to calmly navigating the chaos
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MANAGEMENT • 4 MIN READ
As a successful entrepreneur , business risks are essential to achieving growth and success. While it can be daunting to step outside of your comfort zone, the rewards can be significant.
In this article, we’ll explore the definition and importance of taking risks in business, provide examples of different types of business risks, and offer ideas and strategies for entrepreneurs looking to take calculated risks.
Business risks refers to the process of identifying and pursuing opportunities that may be uncertain or have the potential for failure. It involves taking calculated risks to achieve business objectives and goals , such as increasing revenue, market share, or expanding into new markets.
However, taking risks in business does not mean taking reckless or blind risks that may result in significant losses or problems to the business .
Taking risks in business is critical to achieving significant growth and success. According to the Bureau of Labor Statistics (BLS), 50% of small businesses fail within the first five years, while 65% fail within ten years.
However, businesses that take calculated risks are more likely to succeed and achieve long-term growth.
There are many types of business risks out there. Some are better to take on than others.
Here are 9 examples of business risks and ideas to help take your business to the next level.
Taking risks in product and service offerings can help businesses differentiate themselves from their competitors and appeal to new customers.
For instance, a restaurant may risk offering a new menu item, such as a vegan option, to attract a new customer base and create a competitive advantage.
Expanding into new markets can help businesses tap into new customer segments and increase revenue . It also helps to diversify their income streams and reduce risks associated with relying on one market.
Furthermore, entering new markets can help businesses gain insights into different cultures and new trends in the industry.
Investing in new technology can help businesses increase efficiency, reduce costs, and improve the quality of their products or services. Companies that invest in technology are better equipped to compete in the global marketplace, as the technology helps them stay ahead of their competitors.
In addition, new technology can help businesses become more innovative and agile, allowing them to respond quickly to changing customer needs/
5. diversify revenue streams, 6. hire new talent.
Hiring new talent can help businesses bring in fresh perspectives and ideas, leading to increased innovation and growth . New talent often brings with them fresh insights and skills that can help to grow a business in ways that existing staff may be unable to.
By bringing on new talent, businesses can tap into new markets, create new products and services, and open up new possibilities for growth.
Trying new marketing and advertising strategies can help businesses reach new audiences and increase brand awareness. It can also help to boost sales and build customer loyalty. Companies should be open to experimenting with different strategies to achieve their desired results.
Pursuing a new business model can help businesses adapt to changing market conditions and stay relevant. For instance, when the global pandemic hit, many businesses had to pivot to e-commerce or digital services in order to stay afloat.
Challenges of taking risks in business and solutions, financial risks.
Taking financial risks can lead to significant losses if the business does not generate enough revenue to cover the investment.
To overcome this challenge, entrepreneurs should conduct a thorough financial analysis and consider alternative funding sources, such as loans or investors.
Entering new markets or launching new products can be risky if there is no demand or if the competition is too strong.
To overcome this challenge, entrepreneurs should conduct market research to identify customer needs and preferences and evaluate the competition.
Making significant changes to business operations can be risky if they are not well-planned and executed.
To overcome this challenge, entrepreneurs should create a detailed vision and strategy and test the changes on a small scale before implementing them on a larger scale.
Taking risks that result in negative publicity can damage a business’s reputation and lead to a loss of customers.
To overcome this challenge, entrepreneurs should prioritize transparency and honesty in their operations and communication with customers.
Taking risks that violate laws or regulations can lead to legal penalties and damage to the business’s reputation.
To overcome this challenge, entrepreneurs should consult with legal experts and ensure compliance with all relevant laws and regulations.
Business coaching and mentoring can be an effective way for entrepreneurs to overcome the challenges of taking risks in business and achieve significant growth and success.
2X is a business coaching and mentoring company that helps entrepreneurs grow their business from 6 to 7 figures through customized coaching and mentorship programs.
Their book, From 6 to 7 Figures , provides practical advice and strategies for entrepreneurs looking to take their business to the next level .
Taking risks in business is critical to achieving significant growth and success. However, it requires careful analysis and strategic planning to minimize the potential for negative outcomes. Businesses that take calculated risks are more likely to succeed and achieve long-term growth.
By implementing the ideas and strategies outlined in this article and seeking guidance from a company like 2X, entrepreneurs can take risks that lead to accelerated growth and success in their business.
This has been called “the business Bible for 6-figure entrepreneurs”… now you can get it with exclusive bonuses for a crazy low price!
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Fundamentals of risk assessment: methods and tools used to assess business risks.
CEO of Schwenk AG & Crisis Control Solutions LLC , a leading expert in risk and crisis management for the automotive industry.
In the intricate tapestry of the modern business landscape, every thread is intertwined with an element of risk. From startups navigating the treacherous waters of market entry to conglomerates expanding their global footprint, understanding and adeptly managing these risks has become a distinguishing factor between fleeting success and enduring resilience.
As the pace of innovation surges and the global marketplace transforms, the significance of comprehensive risk assessment is only magnified. As a top expert in risk and crisis management, I've served major clients as well as numerous smaller firms in Europe and the U.S. Here's my guide for businesses.
Risk assessment stands as a cornerstone in strategic business decision-making, demanding a structured and meticulous approach to ensure effectiveness.
At the heart of this process is the task of identifying risks. This involves recognizing and describing potential pitfalls that a business might face. Recognizing these risks early ensures that businesses can allocate resources and strategize aptly without being caught unprepared.
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Following the identification phase, businesses need to quantify the risks, gauging both their potential impact and likelihood.
Employ tools such as statistical models, analyses of historical data and simulated scenarios as they can all provide valuable insights in this dimension. It's through this quantification that businesses can discern which threats merit immediate attention and which can be set aside for later.
Once quantified, the next logical step is to prioritize these risks. Here, businesses rank and evaluate the identified risks, determining which should be addressed first based on their significance.
Instruments like risk matrices , which juxtapose the likelihood of a risk against its impact, play a crucial role in this assessment phase. Not every risk poses an immediate threat, and thus it's essential to ensure the most significant risks are addressed immediately, streamlining resources for maximum efficacy.
Subsequent to prioritization, a comprehensive evaluation of these risks is essential. This phase requires businesses to weigh the magnitude of each risk against their inherent risk appetite.
Compare industry benchmarks, past experiences or predetermined thresholds to decide the most appropriate way to address each threat. This step is pivotal in ensuring that risk management efforts are in harmony with a company's overarching objectives and risk tolerance levels.
Mitigating and managing risks forms the next stage. Strategic decisions come into play, determining how each identified risk should be addressed. Depending on the nature and magnitude of the risk, businesses might opt to transfer the risk through mechanisms like insurance, change their business processes to avoid it entirely, put in place safeguards to diminish its effect, or even accept it outright.
Effective risk management, in this regard, becomes a dual-edged sword; while it safeguards against potential adversities, it can also pave the way for opportunities, enabling growth and improvement.
Risks are inherently dynamic, fluctuating with time and circumstances. Regular audits, feedback mechanisms and even third-party reviews ensure that strategies employed remain effective and that emergent risks are identified promptly.
This continuous monitoring helps businesses stay nimble, adjusting their strategies to the evolving landscape of risks, better ensuring both survival and prosperity in an uncertain world.
1. qualitative assessments.
The qualitative assessment is predominantly based on descriptive, nonnumerical data, and it shines in scenarios where garnering accurate numerical data is challenging. One of its significant advantages is its capacity to harness the power of expertise, intuition and experience to scrutinize risks.
There are several techniques under this umbrella. For instance, SWOT analysis delves into both the internal and external elements that might influence a project or business. It identifies the strengths, weaknesses, opportunities and threats.
The expert judgment method seeks insights from those with specialized expertise. Another technique, the Delphi method , orchestrates a structured dialogue among a panel of experts. This communication continues in multiple rounds until a consensus emerges.
The quantitative assessment employs numerical data. By leveraging statistical, financial or numerical analyses, it provides a more systematic and data-centric perspective on potential risks.
Techniques in this category include the Monte Carlo simulation , which uses an algorithm that hinges on constant random sampling to deduce numerical outcomes. Decision trees provide a visual representation of decisions and their possible results. Additionally, sensitivity analysis explores how varying values of one variable can influence another.
Scenario analysis empowers businesses by laying out an array of potential future situations. It aids in sketching the best-case, worst-case and the most-probable scenarios, enabling firms to visualize and weigh the potential risks and rewards.
Stress testing dives deep into analyzing potential vulnerabilities in any given system. It designs models that emulate challenging, often drastic conditions. A classic example of its application is in the financial realm , where banks deploy this method to unearth potential weak points in their financial statements.
The comparative risk assessment offers a comparative perspective. By juxtaposing potential risks against a benchmark or another risk, businesses can determine which threats deserve immediate attention, especially when resources are sparse and setting priorities becomes vital.
A hybrid method epitomizes adaptability. Realizing that no single technique can capture the entirety of risks, many entities interweave both qualitative and quantitative strategies. This amalgamated approach furnishes a richer, more detailed depiction of the risk environment surrounding a business.
To make an informed decision on which assessment method to employ, decision-makers should consider the nature of the risk, available data and desired depth of analysis.
Whether leaning toward qualitative methods that harness expertise and intuition or quantitative techniques that provide data-centric insights, the key is to choose a method (or combination thereof) that aligns with the specific context and objectives of the business, ensuring both its survival and prosperity amid uncertainties.
In essence, managing risk boils down to four strategies: avoiding it, mitigating its impact, transferring it, or simply accepting it. The chosen approach depends on the nature and magnitude of the risk in question.
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Understand the basics of risk management planning and discover how essential it is for your business to have one.
A risk management plan is a systematic and structured plan to identify, analyze, assess, measure, and monitor risks and threats to an organization. It serves as an important tool for managing the risks that affect the running of an organization.
Simply put, a risk management plan is a comprehensive strategy that identifies and analyzes potential risks to a business or organization and devises solutions to minimize or avoid them, maximizing the probability of success or reaching organizational goals.
Creating a risk management plan can seem daunting, but it’s important to have one in place to help protect your business from risks. Here are the basic steps you need to take to create a risk management plan:
An essential component of any successful risk management plan is the establishment of strong risk culture. Risk culture is commonly known as the shared values, beliefs, and attitudes toward the handling of risks throughout the organization.
It is the responsibility of senior management and the board of directors to create the company culture and set the tone from the top-down and communicated throughout the organization.
Stakeholders emerged from various functions inside and outside of your organization. They could be employees, customers, vendors, etc. In order to plan risk management properly, it is important to engage with them every step of the way. This is because stakeholders provide you with a detailed representation of all facets of your business along with corresponding risks.
A clear policy with delineated roles, responsibilities, and templates is essential for an effective risk management strategy. This will help you identify all risks that could potentially affect your business, evaluate the impact of those risks, and develop plans to mitigate them.
Communication is one of the most important aspects of risk management planning. It is critical for an effective risk management plan to have a good understanding of how communication works and how it can help you to manage risk.
By implementing transparent risk monitoring processes, we can be sure that all risk mitigation endeavors are effective. A risk management plan is an always-changing and essential process. With these best practices, you should be able to create a strategy for your organization.
To make an effective risk management plan, it is essential to know the process of risk management as it is a systematic process used by a company in managing risks.
Empower your team with SafetyCulture to perform checks, train staff, report issues, and automate tasks with our digital platform.
Now that you understand the basics of a risk management plan, it’s time to talk about how to create one. This is important, as it will ensure that your plan is effective and can be used to identify and mitigate any risks that may occur.
There are a few key steps to writing a risk management plan:
By following these steps, you can create a risk management plan that will help protect your business from any potential dangers.
Why use safetyculture.
SafetyCulture can help you create a risk management plan specific to your organization. It features an audit tool that can be used to identify potential risks, as well as thousands of customized templates and forms to help you document and track your risk management activities.
SafetyCulture provides a mobile application to access and store your risk management plan, automatically generate reports after an inspection, and share those reports with the appropriate people. Having SafetyCulture as part of your digital risk management process creates data sets that better inform your decisions and encourage compliance within your organization.
This free risk management plan template lets you identify the risks, record the risks’ impact on a project, assess the likelihood, seriousness and grade. Also, specify planned mitigation strategies and assign corrective actions needed to responsible individuals. Breakdown costs and set the timeline of mitigation actions.
SafetyCulture Content Team
Learn more about reputational risk, why it’s important that businesses properly manage it, and how to effectively implement risk mitigation strategies.
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How you can manage risk in your business, why manage risk, risks that you must manage, types of risk, risk management in your state or territory.
Risk management helps you make better business decisions. It involves reducing the things that could have a negative effect on your business. For example, the reducing the risk of injury by through safety procedures. You can also look for opportunities that could have a positive impact on your business.
Jimmy owns a transport business. He drives trucks, moving commercial products around Australia. Some of the hazards Jimmy faces each day include:
Some steps Jimmy could take to reduce the risks in his daily work include:
Begin by finding out about risk management practices and how you can use them. You should also talk to others involved in your business (including your employees and customers) to decide on the best way to manage risk in your business.
Before you decide what to do, you’ll need to work out what your risks are and which ones are most urgent:
By managing risk, you can reduce the impact of unexpected events on your business.
Managing risk can also help you to:
You won't always have enough information or the resources to manage every risk. A good risk management plan will allow you to change your approach if it isn't working, or when unexpected risk happens.
You're required by law to manage some risks. For example, you must manage or reduce the risk of:
It's a good idea to understand the different types of risks your business may face so you can recognise and plan ahead for them.
Risks can be:
This type of risk comes from taking one opportunity over others. By deciding to commit your resources to one opportunity, you risk:
Opportunity-based risks for a business include moving a business to a different location, buying a new property, or selling a new product or service.
This type of risk is from uncertainty around unknown or unexpected events. It’s hard to predict these events and the damage they can cause. It’s also hard to control the damage once they occur.
Examples of uncertainty-based risks include:
To reduce the impact of uncertain events on your business, you can do things like:
These types of risks come from dangerous situations in the workplace.
Some common examples include:
Australian capital territory.
Learn about risk management for your business on the Access Canberra website.
Read SafeWork NSW's work environment and facilities to help identify safety risks in your workplace.
Read about the NT WorkSafe's small business safety program .
Read about risk management on the Queensland Government website.
Find information on risk management on the South Australian Government website.
Read information on managing risk in your business on the Business Victoria website.
Learn about the different insurance types to protect your business from risk., was this page helpful, thanks for sharing your feedback with us..
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Strategic Planning
While no one likes the idea of having one foot on the brake while doing strategic planning, there are very good reasons to take the time required to be cautious. We are speaking to the undeniable link between the business assumptions we make and the risks we introduce to the organization during strategic planning. In fact, the assumptions we base strategies upon can mushroom into grave risks and show-stopper impediments down the line – appearing out of nowhere when the business attempts to execute to a seemingly well-laid plan. Twelve to eighteen months into strategy implementation is too late to go back and ask, “What were we assuming…?” Given that time will always be of the essence, what kind of strategic assumption vetting and risk management is warranted? How much is enough?
At a minimum, the planning process must involve an evaluation of the impacts that the strategy will have on the business to determine if it will actually help accomplish the outcomes intended. That is the absolute minimum requirement.
The strategic planing process is the one key point to get in front of idle supposition and truly manage assumptions, risks and impediments. When strategy is well developed, there will be an actual plan for implementation associated with the strategy. A holistic plan defines goals that support the strategy and addresses the operational tactics that will accomplish the goals. No business possesses a crystal ball to know exactly what will happen in the economy, financial markets or competitors next bold moves. That means that business assumptions are a necessary evil.
Given that we must rely upon certain assumptions to put strategic plans together and that risk will always be present (as will natural impediments to execution of strategy), the following sections will explore each of these factors at the planning level…beginning with a definition of terms and ending with approaches to better manage process.
The dictionary defines an assumption as follows: “ something taken for granted; a supposition ”.
Assumptions form the basis of strategies, and those underlying assumptions must all be fully vetted. Testing strategic assumptions requires allowing those involved with planning to back away from the “givens” and challenge them to ensure the team is not assuming the rosiest of scenarios on which to base strategy.
Considering that the synonyms for the word “assumption” includes words like “hypothesis”, “conjecture”, “guess”, “postulate” and “theory” the concept takes on a more weighty meaning in the strategic planning process. Yes, assumptions are beliefs we take for granted, but they can be no better than guesses in many cases.
Assumptions are not always justifiable. Defending an assumption may be difficult, as facts are not always available to support the belief. That does not mean that they are incorrect, but it does underscore the challenge assumptions present in planning. In fact, assumptions are particularly difficult to even identify because they are usually unconscious beliefs.
An assumption about assumptions:
One can safely assume that if an assumption is sound, the inferences and conclusions associated with the assumption will also be sound. Unfortunately, the reverse is also safe to assume.
As a noun, risk means something that may cause injury or harm or the chance of loss or the perils to the subject matter. As a transitive verb, risk means to “expose to hazard or danger” or “to incur the risk or danger of”.
In strategic planning, the definitions applying to both the noun and the transitive verb usage are relevant. A risk might be an event or condition that might occur in the future. Likewise, we may risk financial losses if we bet on an assumption that is incorrect.
An unmitigated risk can become an impediment, so risks must be evaluated in terms of the likelihood they will occur and the impact they will have if they do occur. If the impact/likelihood of a risk is high “enough”, we should identify a mitigation path – as an unmitigated risk can become an impediment later on.
All risk can never be removed from a strategic plan, therefore business planning teams must approach risk management from a Cost / Benefit perspective. Business risk mitigation in planning can cost speed, but if risks are addressed early the organization can avoid future impediments.
An impediment is something that makes movement or progress difficult. It differs from being a risk in that risks are future-based and an impediment is something that is occurring now.
During the strategic planning process, impediments might be grouped into macro or micro categories. Macro impediments might include: poor culture, business process inefficiencies, lack of job descriptions, no performance metrics and many other general types of issues. Micro impediments might include: core competency gaps, having people in the wrong roles, lack of sufficient tools to support business functions and technology / infrastructure issues.
Knowing business impediments and factoring them into the planning process adds realism to the strategy being developed and the operational tactics needed to implement it.
Identification of assumptions.
Strategic planning is a team sport, so working in teams is a great way to approach the identification of assumptions. In small groups, conduct a “round robin” to identify the assumptions within each strategic theme of the plan. Review the assumptions compiled by each team and discuss. This same approach can be used to identify impediments and risks.
The following are questions that assist to identify assumptions:
Risks are about events that, when triggered, cause problems. Hence, risk identification can start with the source of problems, or with the problem itself. Remember, risk sources may be internal or external to the organization. Examples of risk sources are: external stakeholders, employees, finance, political and even weather.
Risks are related to the identified threats from SWOT analysis, so that is another valuable reference during the identification process. For example: the threat of losing money, the threat of a major planned product launch being delayed or the threat of a labor strike disrupting critical manufacturing operations. The threats may exist with various entities, most importantly with shareholders, customers and legislative bodies such as the government.
When either source or problem is known, the events that a source may trigger or the events that can lead to a problem can be investigated. For example: banks withdrawing funding support for expansion; confidential information may be stolen by employees; weather delaying construction projects, etc.
Additionally, other methods of risk identification may be applied, dependent upon culture, industry practice and compliance. For instance, objectives-based risk identification can focus on any potential threats to achieving strategic objectives. Any event that may endanger achieving an objective partly or completely can be identified as risk. Scenario-based risk identification – In scenario analysis different scenarios are created. The scenarios may be the alternative ways to achieve an objective, or an analysis of the interaction of forces in, for example, a market or battle. Any event that triggers an undesired scenario alternative is identified as risk. As a final example, a taxonomy-based risk identification can be utilized, where the taxonomy is a breakdown of possible risk sources. Based on the taxonomy and knowledge of best practices, a questionnaire can be compiled and the answers to the questions used to reveal risks.
Dealing with identified assumptions essentially becomes a task of translating the assumption to a risk. Once all risks have been identified, they must then be assessed as to their potential severity of impact (generally a negative impact, such as damage or loss) and to the probability of occurrence.
The assessment of risk is critical to make the best educated decisions in order to mitigate known risks properly. Once risks have been identified and assessed, the strategies to manage them typically include transferring the risk to another party, avoiding the risk, reducing the negative effect or probability of the risk, or even accepting some or all of the potential or actual consequences of a particular risk.
Taking the time and caution to identify, asses and deal with the risks and other factors will always be a worthy investment, even when time is of the essence. The vetting of these factors will pay off in smooth implementation of the strategic plan down the line. Your plan can proceed, free of the potholes and other roadblocks that, with a little planning, might well have derailed the best-laid plans.
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Strategic analysis of a company, what is 'systems thinking' in business.
Risk factors are possible events that, should they happen, could cause a company’s revenues or profits to be lower than what the owner had forecast. They are a standard part of a thorough business plan, whether the plan is designed for internal use by the management team or will be presented to outside investors. Risk factors are also called threats, because they threaten the business’s success and in extreme circumstances even its survival.
The risk factors section of the business plan should go beyond simply listing what might go wrong. Being aware of what could negatively impact the company is important, but the real value of including risk factors is the business owner’s thinking process to determine how she would mitigate the risks to minimize the financial damage to her company. The thinking process is referred to as contingency planning, also know as “what if” analysis. The business owner will make changes to her marketing strategies, operations and financial management in response to these risks becoming a reality.
A company should have a system in place to gather information about emerging or potential risks. Monitoring competitors on an ongoing basis is one aspect of this system. The decisions a company’s competitors make pose threats, because they are designed to give the competitors a stronger market position by taking potential business away from the company. Risk factors are not just considered at the time the company is preparing its annual business plan -- they are year-round considerations, because new threats emerge throughout the year.
A venture capital firm or angel investor that is contemplating putting money into a business enterprise must assess the risk that the company’s financial results will be lower than forecast. The value of the company grows as the revenues and profits of the business grow. The risk factors alert the investor to the fact there is always a possibility of losing part or all of the money he puts into the company. If the investor believes the risks could severely hurt the company should they occur, he may decline to make the investment. As a practical matter, sophisticated investors do their own risk analysis prior to putting money in a company, but the fact the management team is aware of, and has strategies for dealing with, the risks can make the investors more confident about the management team’s abilities.
Analyzing risk factors allows the management team to be confident it is ready for whatever business environment the company may face in the upcoming year and beyond. The team has strategies in place that can be quickly implemented to minimize the damage caused by threats from competitors or changes in the overall economy. The management team assesses which risks are most likely to become actual threats and which have a very low likelihood of occurring. Owners of companies will always have external threats to worry about, but the risk analysis process helps reduce the number of worries to those that have the potential to negatively impact their revenues or profits.
Brian Hill is the author of four popular business and finance books: "The Making of a Bestseller," "Inside Secrets to Venture Capital," "Attracting Capital from Angels" and his latest book, published in 2013, "The Pocket Small Business Owner's Guide to Business Plans."
How do changes in the business environment affect the cost and profit analysis, why perform a swot analysis, what happens when businesses have contingency plans, key concepts of financial management, business enterprise planning, what is the business planning process, what are the parts of an effective risk management program, what is the meaning of corporate planning, assessment strategies in business, most popular.
If 2023 was the year the world discovered generative AI (gen AI) , 2024 is the year organizations truly began using—and deriving business value from—this new technology. In the latest McKinsey Global Survey on AI, 65 percent of respondents report that their organizations are regularly using gen AI, nearly double the percentage from our previous survey just ten months ago. Respondents’ expectations for gen AI’s impact remain as high as they were last year , with three-quarters predicting that gen AI will lead to significant or disruptive change in their industries in the years ahead.
This article is a collaborative effort by Alex Singla , Alexander Sukharevsky , Lareina Yee , and Michael Chui , with Bryce Hall , representing views from QuantumBlack, AI by McKinsey, and McKinsey Digital.
Organizations are already seeing material benefits from gen AI use, reporting both cost decreases and revenue jumps in the business units deploying the technology. The survey also provides insights into the kinds of risks presented by gen AI—most notably, inaccuracy—as well as the emerging practices of top performers to mitigate those challenges and capture value.
Interest in generative AI has also brightened the spotlight on a broader set of AI capabilities. For the past six years, AI adoption by respondents’ organizations has hovered at about 50 percent. This year, the survey finds that adoption has jumped to 72 percent (Exhibit 1). And the interest is truly global in scope. Our 2023 survey found that AI adoption did not reach 66 percent in any region; however, this year more than two-thirds of respondents in nearly every region say their organizations are using AI. 1 Organizations based in Central and South America are the exception, with 58 percent of respondents working for organizations based in Central and South America reporting AI adoption. Looking by industry, the biggest increase in adoption can be found in professional services. 2 Includes respondents working for organizations focused on human resources, legal services, management consulting, market research, R&D, tax preparation, and training.
Also, responses suggest that companies are now using AI in more parts of the business. Half of respondents say their organizations have adopted AI in two or more business functions, up from less than a third of respondents in 2023 (Exhibit 2).
Join Lareina Yee and Roger Roberts on Tuesday, July 30, at 12:30 p.m. EDT/6:30 p.m. CET as they discuss the future of these technological trends, the factors that will fuel their growth, and strategies for investing in them through 2024 and beyond.
Most respondents now report that their organizations—and they as individuals—are using gen AI. Sixty-five percent of respondents say their organizations are regularly using gen AI in at least one business function, up from one-third last year. The average organization using gen AI is doing so in two functions, most often in marketing and sales and in product and service development—two functions in which previous research determined that gen AI adoption could generate the most value 3 “ The economic potential of generative AI: The next productivity frontier ,” McKinsey, June 14, 2023. —as well as in IT (Exhibit 3). The biggest increase from 2023 is found in marketing and sales, where reported adoption has more than doubled. Yet across functions, only two use cases, both within marketing and sales, are reported by 15 percent or more of respondents.
Gen AI also is weaving its way into respondents’ personal lives. Compared with 2023, respondents are much more likely to be using gen AI at work and even more likely to be using gen AI both at work and in their personal lives (Exhibit 4). The survey finds upticks in gen AI use across all regions, with the largest increases in Asia–Pacific and Greater China. Respondents at the highest seniority levels, meanwhile, show larger jumps in the use of gen Al tools for work and outside of work compared with their midlevel-management peers. Looking at specific industries, respondents working in energy and materials and in professional services report the largest increase in gen AI use.
The latest survey also shows how different industries are budgeting for gen AI. Responses suggest that, in many industries, organizations are about equally as likely to be investing more than 5 percent of their digital budgets in gen AI as they are in nongenerative, analytical-AI solutions (Exhibit 5). Yet in most industries, larger shares of respondents report that their organizations spend more than 20 percent on analytical AI than on gen AI. Looking ahead, most respondents—67 percent—expect their organizations to invest more in AI over the next three years.
Where are those investments paying off? For the first time, our latest survey explored the value created by gen AI use by business function. The function in which the largest share of respondents report seeing cost decreases is human resources. Respondents most commonly report meaningful revenue increases (of more than 5 percent) in supply chain and inventory management (Exhibit 6). For analytical AI, respondents most often report seeing cost benefits in service operations—in line with what we found last year —as well as meaningful revenue increases from AI use in marketing and sales.
As businesses begin to see the benefits of gen AI, they’re also recognizing the diverse risks associated with the technology. These can range from data management risks such as data privacy, bias, or intellectual property (IP) infringement to model management risks, which tend to focus on inaccurate output or lack of explainability. A third big risk category is security and incorrect use.
Respondents to the latest survey are more likely than they were last year to say their organizations consider inaccuracy and IP infringement to be relevant to their use of gen AI, and about half continue to view cybersecurity as a risk (Exhibit 7).
Conversely, respondents are less likely than they were last year to say their organizations consider workforce and labor displacement to be relevant risks and are not increasing efforts to mitigate them.
In fact, inaccuracy— which can affect use cases across the gen AI value chain , ranging from customer journeys and summarization to coding and creative content—is the only risk that respondents are significantly more likely than last year to say their organizations are actively working to mitigate.
Some organizations have already experienced negative consequences from the use of gen AI, with 44 percent of respondents saying their organizations have experienced at least one consequence (Exhibit 8). Respondents most often report inaccuracy as a risk that has affected their organizations, followed by cybersecurity and explainability.
Our previous research has found that there are several elements of governance that can help in scaling gen AI use responsibly, yet few respondents report having these risk-related practices in place. 4 “ Implementing generative AI with speed and safety ,” McKinsey Quarterly , March 13, 2024. For example, just 18 percent say their organizations have an enterprise-wide council or board with the authority to make decisions involving responsible AI governance, and only one-third say gen AI risk awareness and risk mitigation controls are required skill sets for technical talent.
The latest survey also sought to understand how, and how quickly, organizations are deploying these new gen AI tools. We have found three archetypes for implementing gen AI solutions : takers use off-the-shelf, publicly available solutions; shapers customize those tools with proprietary data and systems; and makers develop their own foundation models from scratch. 5 “ Technology’s generational moment with generative AI: A CIO and CTO guide ,” McKinsey, July 11, 2023. Across most industries, the survey results suggest that organizations are finding off-the-shelf offerings applicable to their business needs—though many are pursuing opportunities to customize models or even develop their own (Exhibit 9). About half of reported gen AI uses within respondents’ business functions are utilizing off-the-shelf, publicly available models or tools, with little or no customization. Respondents in energy and materials, technology, and media and telecommunications are more likely to report significant customization or tuning of publicly available models or developing their own proprietary models to address specific business needs.
Respondents most often report that their organizations required one to four months from the start of a project to put gen AI into production, though the time it takes varies by business function (Exhibit 10). It also depends upon the approach for acquiring those capabilities. Not surprisingly, reported uses of highly customized or proprietary models are 1.5 times more likely than off-the-shelf, publicly available models to take five months or more to implement.
Gen AI is a new technology, and organizations are still early in the journey of pursuing its opportunities and scaling it across functions. So it’s little surprise that only a small subset of respondents (46 out of 876) report that a meaningful share of their organizations’ EBIT can be attributed to their deployment of gen AI. Still, these gen AI leaders are worth examining closely. These, after all, are the early movers, who already attribute more than 10 percent of their organizations’ EBIT to their use of gen AI. Forty-two percent of these high performers say more than 20 percent of their EBIT is attributable to their use of nongenerative, analytical AI, and they span industries and regions—though most are at organizations with less than $1 billion in annual revenue. The AI-related practices at these organizations can offer guidance to those looking to create value from gen AI adoption at their own organizations.
To start, gen AI high performers are using gen AI in more business functions—an average of three functions, while others average two. They, like other organizations, are most likely to use gen AI in marketing and sales and product or service development, but they’re much more likely than others to use gen AI solutions in risk, legal, and compliance; in strategy and corporate finance; and in supply chain and inventory management. They’re more than three times as likely as others to be using gen AI in activities ranging from processing of accounting documents and risk assessment to R&D testing and pricing and promotions. While, overall, about half of reported gen AI applications within business functions are utilizing publicly available models or tools, gen AI high performers are less likely to use those off-the-shelf options than to either implement significantly customized versions of those tools or to develop their own proprietary foundation models.
What else are these high performers doing differently? For one thing, they are paying more attention to gen-AI-related risks. Perhaps because they are further along on their journeys, they are more likely than others to say their organizations have experienced every negative consequence from gen AI we asked about, from cybersecurity and personal privacy to explainability and IP infringement. Given that, they are more likely than others to report that their organizations consider those risks, as well as regulatory compliance, environmental impacts, and political stability, to be relevant to their gen AI use, and they say they take steps to mitigate more risks than others do.
Gen AI high performers are also much more likely to say their organizations follow a set of risk-related best practices (Exhibit 11). For example, they are nearly twice as likely as others to involve the legal function and embed risk reviews early on in the development of gen AI solutions—that is, to “ shift left .” They’re also much more likely than others to employ a wide range of other best practices, from strategy-related practices to those related to scaling.
In addition to experiencing the risks of gen AI adoption, high performers have encountered other challenges that can serve as warnings to others (Exhibit 12). Seventy percent say they have experienced difficulties with data, including defining processes for data governance, developing the ability to quickly integrate data into AI models, and an insufficient amount of training data, highlighting the essential role that data play in capturing value. High performers are also more likely than others to report experiencing challenges with their operating models, such as implementing agile ways of working and effective sprint performance management.
The online survey was in the field from February 22 to March 5, 2024, and garnered responses from 1,363 participants representing the full range of regions, industries, company sizes, functional specialties, and tenures. Of those respondents, 981 said their organizations had adopted AI in at least one business function, and 878 said their organizations were regularly using gen AI in at least one function. To adjust for differences in response rates, the data are weighted by the contribution of each respondent’s nation to global GDP.
Alex Singla and Alexander Sukharevsky are global coleaders of QuantumBlack, AI by McKinsey, and senior partners in McKinsey’s Chicago and London offices, respectively; Lareina Yee is a senior partner in the Bay Area office, where Michael Chui , a McKinsey Global Institute partner, is a partner; and Bryce Hall is an associate partner in the Washington, DC, office.
They wish to thank Kaitlin Noe, Larry Kanter, Mallika Jhamb, and Shinjini Srivastava for their contributions to this work.
This article was edited by Heather Hanselman, a senior editor in McKinsey’s Atlanta office.
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Reporting by Greg Bensinger in San Francisco, Valerie Volcovici and Ahmed Aboulenein in Washington, and Chris Prentice, Echo Wang, Megan Davies, Lananh Nguyen and Nupur Anand in New York; editing by Chris Sanders, Leslie Adler and Alistair Bell
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Republican presidential candidate Donald Trump told Christians on Friday that if they vote for him this November, "in four years, you don't have to vote again. We'll have it fixed so good, you're not gonna have to vote."
In the past several years, homeowners across the state have been either burdened with extremely high insurance premiums or have struggled to find coverage at all. Wildfires have sent California’s homeowners insurance market into crisis and the situation is only getting worse. So far, 2024 has seen 219,247 acres burned , more than 20 times the amount this time last year. As wildfires become more frequent and destructive, insurers have worked to lower their risk exposure through rate hikes, nonrenewals, and even halting new policies in the state entirely.
New buyers and those whose policies have not been renewed have limited options since the biggest companies, State Farm, Farmers, Allstate, USAA, Travelers, Nationwide and Chubb, have limited or paused new policies in the last few years. Earlier this month State Farm’s cancellations of 30,000 homeowner policies mostly in high wildfire risk areas, took effect. In late June, State Farm requested a 31% rate increase , its largest increase in recent history, on the heels of a 22% increase earlier this year. Allstate also recently filed a request for a significant 34% rate increase .
Homeowners are finding the expense and lack of options unsustainable. Sharon Goldman, longtime resident of the Pacific Palisades, has not had her policy canceled yet, but she has seen increases to her premium and worries she could be next. In her ZIP Code the wildfire risk is high, and State Farm decided to not renew 70% of their policies. Starting in 2019, rates of nonrenewals in high- and very high-risk areas grew to 14% compared with 3% and 2% for moderate- and low-risk areas.
Goldman, using her maiden name out of concern for retribution from State Farm, has paid her premiums each year since she bought her home 50 years ago. She has never filed a claim. But she has seen her rate increase 78% in the past two years. Her agent has told her that her fire coverage will be replaced with the state-run FAIR plan in 2025, an increasingly common insurer strategy that leaves homeowners paying more for less coverage.
Goldman and her neighbors are left wondering what options they have left. She hears stories of people paying tens of thousands a year, an impossible amount for her to cover on her retirement budget. She has started looking into moving out of state and out of the home where she raised her children.
While the state does not require insurance, mortgage lenders do. So, going without is not an option for many. Those whose mortgage is paid off, like Goldman, may not be comfortable leaving their home, typically their most expensive asset, uninsured. High rates and loss of fire coverage have pushed desperate homeowners to riskier nonadmitted carriers or to the state-run FAIR plan, meant to be the plan of last resort. But the California Department of Insurance worries that it is quickly becoming overburdened.
Over the past year, Insurance Commissioner Ricardo Lara has been rolling out his plan to increase policy writing in vulnerable areas and get people off of the FAIR plan. One big component of his strategy is allowing insurers to use wildfire catastrophe models to set overall rates. Insurers say the tool would help them more accurately predict the correct rate for the amount of risk.
As a trade-off, Lara says companies that use these models will be required to increase service in distressed areas with a high wildfire risk and a high concentration of FAIR plan policies.
In public workshops held by the Department of Insurance, consumer advocates raised concerns about a lack of transparency with “black box” models that may be used to justify unnecessary rate hikes. Industry advocates are concerned the plan will take too long to implement when they desperately need changes now.
There are many versions of catastrophe models. Each modeling company has their own proprietary analysis but they all generally use the same data inputs to answer the same question.
Each modeled event starts with an ignition , the probability that a fire will start at that location, spread , the probability that the fire will travel based on the land cover in the area, and property characteristics . Using those data, the model simulates a large number of possible outcomes for a given location, estimates the likelihood that a structure will burn from wildfire, and calculates the loss for any buildings there.
The USDA Forest Service developed a national analysis of wildfire risk that is similar to what models created for insurance companies would look like. Based on vegetation and fire-behavior fuel models, topographic data, historical weather patterns and long-term simulations of large wildfire behavior, their wildfire likelihood map shows the probability of a fire in any given year.
A critical part of predicting the potential spread of the fire is the available fuel. The Forest Service’s land cover classifications are used in many wildfire models. They specify 40 different fuel types such as grass, shrub, timber, and nonburnable types. Each category is further subdivided based on depth of the cover and humidity or aridity of the climate.
For example , in an arid climate, coarse continuous grass at a depth of 3 feet would have a very high spread rate. A combination of low grass or shrubs and dead leaves or needles in the forest would have a low spread rate.
Property characteristics such as the type of roof or whether the siding is fire-resistive make a significant difference in whether a structure will ignite from wildfire embers. The Center for Insurance Policy and Research found that structural modifications can reduce wildfire risk up to 40%, and structural and vegetation modifications combined can reduce wildfire risk up to 75%.
All of these factors are combined in the model with information about the rebuilding cost and level of coverage to generate an amount of risk unique to the individual property.
Currently, companies are required to calculate their projected losses, on which their overall rates are based, using a historical view of wildfire loss over the previous 20 years. As wildfires increase, however, this means that the average loss trails behind the current state of wildfire risk.
Nancy Watkins, an actuary and principal at the insurance consulting firm Milliman, said that she believes the inclusion of catastrophe models could save the industry. She analyzed the effect of a model on rates compared with using just historical experience. While the rates would generally be higher, the increases would be more even.
In April during a public meeting, Allstate said that if wildfire catastrophe models were allowed, they would once again start writing new policies in the state.
But wildfire catastrophe models are already used by insurance companies in California for some business decisions and have been for some time. They use models to determine where to write or renew policies, which is one of the reasons nonrenewals have disproportionately happened in high-risk areas.
In recent rate filings, Allstate, Farmers and State Farm cited a modeled wildfire risk score as the basis for not renewing policies. Allstate used CoreLogic’s Risk Meter score in 2019 to classify all policies that fell above certain risk thresholds as ineligible for renewal. A 2023 filing from Farmers documents eligibility guidelines for new and renewing policies that sets a risk level using Verisk’s FireLine and Zesty.ai’s Z-FIRE scores. State Farm’s recent 30,000 nonrenewals are based on CoreLogic’s Brushfire Risk Layer.
Amy Bach, executive director of United Policyholders, says that wildfire models worked their way into rates without enough state oversight. “We didn’t regulate the use of risk scores and now [they] are having a dramatic impact on the market and the genie is out of the bottle.”
Some companies use models to assess relative risk between properties and adjust individual rates accordingly. State Farm multiplies its base rate by a location rating factor, calculated using catastrophe models produced by CoreLogic and Verisk. Areas with high wildfire risk have seen dramatic increases in the location rating factor in the past few years.
This process is called segmentation and the Department of Insurance is aware that it is opaque. Department spokesperson Michael Soller says, “People do not know what their risk score is. They don’t know what goes into the risk score. It’s a black box. Yet, the risk score can be used to [charge you] double what somebody else pays.”
Some high-risk areas have seen rate increases of nearly 300% since 2020.
July 26, 2024
While these situations are significant for some, they generally only apply to select high-risk properties. The median effect of the location rating factor has remained fairly stable.
But under the commissioner’s new policy, model results could also be incorporated directly into the overall rate. Soller says that one important difference in this new regulation is that for a model to be valid, it will need to incorporate property and community level risk mitigation into rates, including state agency forest thinning and utility company efforts. As more investment goes into making communities safer, in theory the rates should decrease.
Wildfire mitigation happens at the state and local level. Since 2020, in addition to baseline spending, California has allocated more than $2.6 billion towards its wildfire and forest resilience package. 872 communities in the state are registered participants in Firewise USA, a program administered by the National Fire Protection Association that sets standards for fire safety.
For an individual, retrofitting one’s home for wildfire resistance is not cheap. On average, homeowners spend $15,000 on a new roof.
As of October 2022, companies such as State Farm that use wildfire models in segmentation are already supposed to give mitigation discounts. A February filing from State Farm breaks down how their discounts would work in a low-, medium- and high-risk area.
For the low-risk group, the dollar amount saved may not be worth the investment in mitigation. For the high-risk group, the slightly lower percentage reductions would still result in more substantial dollar amounts saved.
According to the State Farm documents, these discounts are given at a set rate for all properties across the state. Granular catastrophe models take into account the impact of mitigation on the property level, nearby community mitigation and any recent wildfire history that might indicate a temporarily reduced risk.
However, a complaint raised several times during the regulation workshops was that when homeowners do spend money, often thousands, on lowering risk, they do not see any changes in their insurance premiums. Some say their policies were still dropped.
Goldman has already completed the property-level mitigation work. She has a class A Spanish tile roof. She does the brush clearance every year. This past year it cost about $1,200. She even has an outdoor sprinkler system. But she did not learn about mitigation from her insurance company. Instead, it was on one of Bach’s monthly educational community calls where she got the idea to install fire-resistant vents.
Sharon Goldman walks through the exterior of her home where she has lived for about 50 years and raised four kids in Pacific Palisades. (Dania Maxwell/Los Angeles Times)
And yet, she has not received a mitigation credit from State Farm and has not received any information about how to receive one. When she asked her agent whether the work she had done on her home qualified for a discount he said no. The Department of Insurance says that they review consumer complaints for rate accuracy and conduct regular examinations of insurance companies. They noted that concerned consumers should contact them to review their specific situation.
The catastrophe modeling regulation requires insurers to submit their modeling information to the Department of Insurance for review by an internal model advisor and any necessary consultants. Some proprietary information is allowed to remain confidential but proponents of the plan say that the regulators will have all the information they need to assess the models even if the general public does not.
The department says it is still considering public input from the most recent workshop and has no further plans for additional workshops. Once the regulation is finalized there will be a public hearing. Commissioner Lara plans to have this regulation and the rest of the Sustainable Insurance Plan in place by the end of the year.
In addition to forward-looking catastrophe models, Lara’s plan will introduce the ability for insurance companies to include reinsurance costs in rates and to increase coverage in the FAIR plan. Details for both of those changes are expected to be released this month.
July 11, 2024
July 2, 2024
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Gabrielle LaMarr LeMee is a data reporter on the Los Angeles Times Data Desk. She was previously the data editor at Chalkbeat, a nonprofit news organization covering education across several cities and states. LaMarr LeMee has a master’s degree in information design and data visualization from the College of Arts, Media and Design at Northeastern University.
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July 27, 2024
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Gordon Scott has been an active investor and technical analyst or 20+ years. He is a Chartered Market Technician (CMT).
Before a business can assess or mitigate business risk , it must first identify probable or likely risks to its bottom line. There is no surefire method for identifying these risks, but companies rely on past experience for reasonably approximating what could happen. Risk processes naturally evolve and mature over time, but there are some fundamental principles that stay constant.
Business risks come in all shapes and sizes. This means that effective risk assessment must be adaptable to or uniquely designed for specific dangers. Whenever possible, a firm should group similar risks into comparable analytic processes.
Ideally, a company should allocate capital based on risk as determined by cost-benefit analysis. Every risk identification process should lead to effective analysis, and every analysis should inform corporate governance .
Two broad forms of risk primarily affect a business: internal and external.
External risks are those that originate outside of the firm and include economic trends, government regulation, competition in the market and consumer taste changes.
External risk assessment is almost always data heavy. Since most external risks are systemic to an economic system—and therefore outside of the control of the company—forecasts cannot be adjusted based on different corporate governance decisions.
The external assessment begins by categorizing potential risks. Some scales are nominal, and some are ordinal. Companies prefer nominal categories because they are easier to manipulate and compare. Quantitative techniques, such as benchmarking or probabilistic modeling, adapt to new data as it arrives. Companies can then track relevant indicators and create thresholds of acceptable risk for a given project.
Internal risks affect far more specific and controllable processes. Risks include employee performance, procedural failure, and faulty or insufficient infrastructure. Companies use operational risk assessment for risk of loss from inadequate business decisions. Compliance risk assessment is crucial, particularly in tightly controlled industries, such as banking or agriculture.
Internal audit risks must be assessed, particularly for publicly traded companies. It wasn't long ago that companies simply operated on industry-standard practices. Modern companies, however, assess internal risks by considering the likelihood and impact on specific objectives.
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Are you living in one of them?
Social Security is the foundation for most Americans' retirement plans. Without that benefit program, nearly 4 in 10 Americans 65 and older would have incomes that fall below the federal poverty line, according to the Center on Budget and Policy Priorities. The difference between keeping all of their benefits and losing even a portion of them can be massive for those households. And even for those who enter retirement on a solid financial footing, Social Security usually plays a key role in their budgets.
Unfortunately for people living in nine states, depending on their incomes, there's a chance they'll owe state income taxes on a portion of their Social Security benefits this year.
Here's what you need to know.
Anyone collecting Social Security ought to know the details of how the federal government taxes their benefits.
The federal government will tax a portion of your Social Security benefits if your "combined income" exceeds certain thresholds. Combined income is a special metric used just to determine Social Security taxes. It's equal to the sum of half your Social Security income, your adjusted gross income , and any untaxed interest income. Benefits are subject to taxation based on the following table.
Taxable Portion of Benefits | Combined Income, Individual | Combined Income, Married Filing Jointly |
---|---|---|
0% | Less than $25,000 | Less than $32,000 |
Up to 50% | $25,000 to $34,000 | $32,000 to $44,000 |
Up to 85% | $34,001 and up | $44,001 and up |
Data source: Social Security Administration.
You might look at those thresholds and think they're quite low, and you'd be right. Congress has not updated them for inflation in over 30 years, and there's no plan in Washington to adjust them in the future. But as benefits receive cost-of-living adjustments almost every year, more and more retirees are paying taxes on some of their Social Security.
Careful planning could help you avoid a surprise tax bill come April. Retirees collecting Social Security need to consider how additional capital gains or retirement account withdrawals will impact their overall tax bill. But retirees in nine states have an extra consideration to worry about.
Image source: Getty Images.
Most states don't tax Social Security benefits, and the number that do has been dropping. Kansas, for example, just eliminated its tax on Social Security earlier this year, effective for the 2024 tax year.
But nine states still impose some income taxes on some people's benefits. If you live in one of these states you should take the extra time to do some research on your personal situation or consult a professional to learn if there are ways to reduce your tax bill.
Here are the basics for each state.
Colorado: Taxpayers under 65 with more than $20,000 in taxable benefits on their federal income tax return will owe state income taxes on the amount above that threshold. Retirees 65 or older are exempt from state taxes on Social Security benefits. The state tax rate is 4.4%.
Connecticut: The portion of your Social Security income that is taxed at the federal level may be subject to state taxes in Connecticut if your adjusted gross income exceeds $75,000 for individuals or $100,000 for joint filers. However, the amount subject to state taxes is limited to 25% of your benefits, regardless of what percentage is taxed federally. The tax rate ranges from 2% to 4.5%.
Minnesota: Taxpayers can deduct up to $4,560 as individuals or $5,840 for married couples filing jointly in Social Security benefits from their taxable incomes. That deduction begins getting reduced for residents with combined incomes above $69,250 for individuals or $88,630 for married couples, and phases out completely at combined incomes of $78,000 or $100,000, respectively. The income tax rate ranges from 6.8% to 9.85%.
Montana: Any portion of your Social Security income that is taxed at the federal level is also subject to state income tax in Montana. The tax rate ranges from 4.7% to 5.9%.
New Mexico: Taxpayers with adjusted gross incomes exceeding $100,000 for individuals or $150,000 for married couples filing jointly will owe state taxes on any Social Security income that is also taxed at the federal level. https://www.tax.newmexico.gov/social-security-income-tax-exemption/ The state tax rate ranges from 4.9% to 5.9%.
Rhode Island: Taxpayers below their full retirement age as defined by Social Security with adjusted gross incomes above certain thresholds will owe taxes on any portion of Social Security income that is also taxed at the federal level. Those thresholds were $101,000 for individuals or $126,250 for married couples filing jointly in 2023, but they get adjusted for inflation each year. The tax rate ranges from 4.75% to 5.99%.
Utah: Taxpayers with adjusted gross incomes exceeding $45,000 for individuals or $75,000 for married couples filing jointly will owe taxes on any Social Security income that is taxed at the federal level. People below those thresholds qualify for a credit to offset the taxes. The tax rate is 4.65%.
Vermont: Taxpayers with adjusted gross incomes above $50,000 for individuals or $65,000 for married couples filing jointly will owe income taxes on at least a portion of any Social Security income included on their federal income tax return. The tax rate ranges from 3.35% to 8.75%.
West Virginia: 65% of any Social Security income included on your federal income tax return is subject to state income tax in West Virginia. However, those taxes are being phased out. In 2025, 35% will be taxable, and starting in 2026, the state will stop taxing benefits. The tax rate ranges from 2.55% to 5.525%.
While retirees in those nine states may be subject to extra taxes, it's important to consider the big picture in retirement.
Hopefully, you'll have a long retirement, and states' tax policies can change drastically over time. Many have taken steps to reduce or eliminate their taxes on Social Security in just the past few years.
More important considerations for picking where you'll settle down in retirement may include the cost of living and what a community has to offer. Those factors can have much bigger impacts on your ability to live on your own terms in retirement than a few dollars worth of state taxes.
That said, there are many different ways to reduce your tax bill in retirement without changing where you live. Planning in advance, effectively using Roth retirement accounts, and managing your capital gains and losses can help avoid taxes and keep more of your retirement income for yourself.
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Taking a safe driver course can save you 10 percent on the premium, one expert said. Improving your credit score can also help as can getting married.
By Ann Carrns
Even as inflation has eased , car insurance rates are rising by double digits. But drivers have some options for reining in premiums.
According to the Bureau of Labor Statistics, auto insurance costs were 19.5 percent higher in June than a year earlier. Insurers blame the higher cost of automobiles, parts and repairs, as well as more accidents because of lingering bad driving habits that spread during the depths of the pandemic. They have also cited increased losses from severe weather, including hail storms .
Most drivers already know about discounts available for “bundling” auto and homeowner insurance policies with the same carrier or for insuring multiple cars. But other tactics can help as well.
Becoming a better driver may help. Just one accident can mean you’re paying an average of 43 percent more than drivers with clean safety records, according to the financial website Bankrate, which analyzed insurance data from Quadrant Information Services. The average annual premium for a driver with full-insurance coverage and a pristine driving history is just over $2,300, the analysis found, while the average for a driver with one at-fault accident is about $3,300.
Cultivating safe habits behind the wheel — like setting your phone to “do not disturb” to avoid distraction, and keeping a safe distance from the car in front of you — can help avoid accidents, said Ryan Pietzsch, a driver safety expert with the National Safety Council, a nonprofit focused on reducing preventable injuries and death. He suggested following the “three second” rule: Note the car ahead of you as it passes a fixed object, like a sign along the road. Then, start counting slowly from one to three (say, “one, one thousand; two, one thousand; three, one thousand”). If your car passes the sign before you reach three, you’re too close.
Taking a safe driver course may save you 10 percent on your auto premium, said Benjamin Preston, an auto writer at Consumer Reports. Check with your agent to see if it’s an option in your state. Some courses charge a fee.
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