Insurance as an analogy to justify risk management costs

From the Easy in theory, difficult in practice Blog
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My musings on project management, project portfolio management and change management. I'm a firm believer that a pragmatic approach to organizational change that addresses process & technology, but primarily, people will maximize chances for success. This blog contains articles which I've previously written and published as well as new content.

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Categories: Risk Management


For organizations lacking standard practices in project portfolio and project management, risk management might seem like an unnecessary use of resources.  I’ve even heard some executives say that with insufficient resources to deliver the expected scope on all of their “critical” projects, how can they afford to have project teams “waste” effort on risk management activities.

For those of us that have come through the PM “school of hard knocks”, such statements might appear myopic if not downright idiotic.  However, this leadership perception of low value in this knowledge area often stems from poor implementation of risk management practices – an article I wrote a few years back highlights some of these issues.  Buried within that article was an analogy that might help you convince your executives of the benefits that value-based risk management can offer.

Ask the nay-saying executive whether they have purchased house insurance.

If they have a mortgage on your property, their lender will probably insist on coverage for at least the value of their loan.  However, once a mortgage is paid off, the home owner could elect to avoid insuring their house, but most people would likely still maintain this insurance over the duration of their home ownership.  If you ask the executive why they do this, they’d likely offer some variant on the following rationale: “to protect my investment from the unknown”.

Probing deeper, if you ask the same executive how much they spend on home insurance each year, and you multiply that by twenty years, you would likely come to a figure that is at least 2% of the original purchase price of the home.  Insurance is just an example of the transfer risk response approach.  If we added all the costs we incur to mitigate home risks, the 2% estimate would likely be significantly higher.

So, after having led the executive through this analogy, leave them with the question “You agree that it is important to insure your home against the unknown, so why not apply the same approach to the projects you are sponsoring – surely they are as important to the organization as your home is to you?”.

Investing in the right amount of risk management “insurance” can protect your project from the catastrophic costs of fire-fighting.

(Note: this article was underwritten by me in February 2011 on my personal blog, kbondale.wordpress.com)

Posted on: July 11, 2018 06:59 AM | Permalink

Comments (16)

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Yes!! Any big construction project should be provided insurance premium by the contractor to transfer any big risk to third party!!!

Very interesting, thanks for sharing

Very valid point there Kiron

Risk management is vital as sometimes risks can be turn to opportunities if project managers become proactive.

Thanks Eduin, Cibin & Damian!

Tamer - the article is about how you explain the value of risk management by using the analogy of insurance, not about the common risk transfer response of buying insurance.

Informative article, Kiron and thanks for sharing.

Good analogy Kiron. I guess the difference comes down to the feeling of ownership or the lack thereof.

Thanks Anish!

Good point Sante - if sponsors feel they are making an investment, they are more likely to want to protect it!

Kiron

Good analogy thanks for sharing. Will use it if the occasion arises.

Absolutely, but like Sante suggests, there is a bit of a disconnect when comparing home and project, though the analogy is apt.

Great point Kiron, very good analogy between insurance and risk management that emphasizes the importance of this useful knowledge area.

Kiron, we all know your example of house insurance is the right example but it is not the practical one we can't through this kind of argument in the face of the key stakeholders, we need to find more rational way to convince them not to agitate them. Thanks for sharing

Thanks Michael, Andrew, Cheikh & Rami! Riyadh - it is an analogy so as good storytellers we have to pick the "right" story for the audience!

Kiron

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