The Manufacturing Executive
The Manufacturing Executive

Episode · 10 months ago

Not By Accident: Risk Management for Manufacturing Executives w/ Van Carlson


Risk management isn't an accident. If we're going to survive, then we have to plan for unforeseen events. Like 2020… and 2021.

But you can't insure everything, and rate increases seem to be hardening. What can manufacturers do to manage risk more effectively?

In today's episode, I talk with Van Carlson, founder and CEO at Strategic Risk Alternatives. Van brings to the conversation more than 25 years of experience in insurance. He focuses on solving client risks through risk alternatives and management.

Here's what Van and I discussed:

  1. What manufacturers can do about the increase in traditional insurance premiums
  2. How to prevent gaps in risk management strategies
  3. The risk management tools available to manufacturers

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I can't tell you because it's setmeetings where they sit. I've always wonder how I can manage that risk moreeffectively. I just didn't know this is the way you can do it.Welcome to the manufacturing executive podcast, where we explore the strategies and experiences thatare driving mid size manufacturers forward. Here you'll discover new insights from passionate manufacturingleaders who have compelling stories to share about their successes and struggles, and you'lllearn from B tob sales and marketing experts about how to apply actionable business developmentstrategies inside your business. Let's get into the show. Welcome to another episodeof the Manufacturing Executive podcast. I'm Joe Sullivan, your host and a COfounder of the Industrial Marketing Agency Gorilla Seventy six. After a year of unpredictability, here we are looking at a future where the word risk has a verydifferent meaning to many of us, and my guest today is someone who's builthis career around risk management. Van Carlson is here to talk about exactly that, and specifically for the manufacturing sector. Van Carlson is the founder and CEOat Strategic Risk Alternatives and, as over twenty five years of experience within therisk management industry. Van began his career with farmers insurance group as an agent, eventually growing his book to be among the largest in his home state ofIdaho. Fan Focuses strategicals alternatives on risk management primarily and facilitates SRA to aassess and solve for the risks their clients have. Van's primary goal is tocontinue the upward growth of s Ra and continue to develop new products to bringto market. Van, welcome to the show. Hey, thank you forhaving me on you. I appreciate you taking the time for me and giveour message out there to your listening audience and look forward our discussion. Yeah, me too. It should be it should be great. So I thinkit's a very timely topic, especially just given the the craziness of the lastyear or so, I guess. Before we get into it, van,can you start by just telling our listeners a little bit about how you gotinto this world of risk management? Yeah, so, you know, risk managementsby accident, of course, like most careers, I think, andnow nowadays. But yeah, so, you know, again in risk management, wasn't planning for it. So I got out of college and start lookingfor different jobs and owning my own business. I was always appealing to me.So in turns a running in insurance company allowed me to do that andsays how I got into it. I was pretty successful. Add it grewmy grew my book a business and insurance world pretty well enough to where Ican start get it all my hats away to other people and hire people andso forth, and I really kind of gravitated towards business owners and really morewith insulting with business owners on risk, and that's what really elevated me tothink of myself more risk manager than in somebody outside the insurance and I thinka lot of business owners today kind of have to have that in the backgroundand meaning that they had either rely on a consulting person to be able tohandle the risk more more effectively, because unfortunately, risk is getting more andmore complicated. I think our last year proves that out to be the case. When you know you don't know how good in your church is going tobe, to need it and then sometimes you find out it's maybe not everythingyou thought it was going to be. So that's where the consulting comes intorisk management and you know I really got into what we do today. Primarily, it was a noay and really had to do more than financial. Youknow, wal they called the great recession, and that's we became very learing thatbusiness owners think a lot of financial risk to run the business every dayand a lot of things are outside their control and when things like that happen, you know, how do you mitigate that? And I saw some peoplethat were utilizing the tools that we offer our clients today that not only didthey survived the downturn, but they've thrived in it, and that's what Ithought. You know, this is what this is. This was a smartmoney does. This is, you know, they don't run to the stock marketwhen everybody's buying it. They you...

...know, this is this is howyou you survived your company and you think of things outside the box and youknow, unfortunately a lot of people think you know this because they haven't heardof this concept of some kind of form of Risk Mitigating Ris Mitigation. Shouldyou utilizing tax differ dollars out of the property company? Doesn't mean they should. They should always look at all the tools that are available to him andmake a decision. If it's a tool for them or not, and that'swhat really got me going into and then, too, you know that that broughtme to a consulting with clients on a whole another level, and it'sreally has to do with what we call unfunded risk on your balance sheets,right that you get any risk where you can transfer that to traditional terms companiesand in the be risk or unfunded risk, and that's kind of where we kindof run in the between the bandwidth that and so that's unfortunately, youknow, there's a lot of be be unfunded risk on their books and youknow, sometimes they learned at the wrong time and unfortunately a lot of clientsdid last year, I think covid nineteen. I think you know, just likethe financial or the great recession, when you come out on the backend of these things, you will be a better business owner from the standpointof the experience. You know, you live from your experiences and you know, I don't think a lot of people, I don't think anybody's all this coming, obviously, but you know, going forward now, I you know, and being better prepared for these unforeseen issues gives your ability for your companiesto survive, and we all work too hard to run our businesses and doall those things and then have something come in that we may have been ableto control better had we just known as certain things were available to us andtake advantage of and so we're excited about the future of our company. Weseen a big up growth and clients understanding the concept I just mentioned, theunfunded liabilities on your books and how do you minigate that rispect more effectively?And that's utilize it really a very little known task code called a thirty oneB. There's two task codes. Allows business owners to defer income into theirbusiness. One as a fore K and that's really designed for their retirement andemployees retirement, and then they thirty one B, is the ability for yourcompany to survive and related to unfunded risk. If I have a risk, it'sunfunded. I can't just take a dollar and set it off to theside and say, if something this happens, I'm mean to use a dollar.Our current task code in the United States says now that's income self.Insuring risk is not a deduction, and that's when Congress introduces tax code.was really back in one thousand nine hundred and eighty six they threw to abeing farmers are finding themselves self ensuring their crop insurance. Private sectors for gettingout of it. For, you know, for profit insurance companies were getting outof it. And now, of course, the government is heavily involvedin crop insurance. So different than they are with flood insurance or earthquake zonesor even hurricane zones. Now we're there's such catastrophic advance only the government canreally step in and ensure those types of risk, and so that's why thecode was designed. Was Really designed for unfunded liabilities. And then, course, now you fast forward to thirty some years later, risk has gotten muchmore complicated. Technologies, the supply chain risks that we're at looking at today, grant coverages, I mean, I can go on on about the reallythe risk that traditional turns companies aren't going to take on. We call itthe intangible assets of the business. Verse is the tangible. We think traditionalchurns companies do a very good job insuring your buildings, your your inventory,your warehouse, all those things. Those are the tangible assets of your businessthat typically you depreciate, where the intangible assets of your business is your intellectualproperty, your contracts, your reputation, in the community, all those things. That's the intangible. I don't believe traditional terns companies do a very goodjob at all when it comes to covering your intangible assets. And so whatfor your listeners want, if you I just want to make sure they understandit. You know, I most business owners understand their insurance policies aren't goingto come for everything. They might see a policies as all risk and thenthat inch behind that word is really the exclusions that they've been putting in thepolicy. So you know, if your policies are getting wider, it's notbecause they're increasing coverages, it's really because of pretty more exclusions in the policy. And so that's still so those are...

...things that we go in there andwe talked about recall. The specifically to your listeners in the manufacturing industry wehave a lot of clients out there that they know their risk'Speitich when itcomes to recall, when it comes to brand damage, supply chain risk ishuge today. I mean it's almost the news every day right now and Ithink a lot of has to do with Covid nineteen of plants shutting down herefor thirty days and apart not being manufactured in time, all of those thingsand, the course, that rippling effect throughout the supply chain. Risk canbe quite detrimental and our policies are really designed to maintain in the cash flowof the business and and that's where we go in and kind of, youknow, assess their risk and how do we take care of some of thesethings in a way that that allows you in the future to manage that riskmore effectively? And what are you hearing in regard to traditional insurance premiums potentiallyincreasing or the overall traditional insurance market hardening? And is there anything that leaders ofmanufacturing organizations can do about it? Yeah, there's there's gonna be alot of things, I think. Well, first off, you can see theright in the wall. I mean the rates are definitely increasing this year. We've had a softening of the market for, I would say the probablythe last ten plus years, quite honestly. You know there's going to be gapsof industries that may see rate increases because of one thing or another,but overall rates have been pretty steady. But we're seeing substantial not just doubledigits, but you know we're talking like fifty, sixty percent rating increases intraditional insurance companies and a lot there's a lot of reasons for it. Ithink of the nineteen now she's a big driver of that. There's been acompression of competition. There's just been a lot of industries it and manufacturers unfortucingone of them that you don't have a lot of insurance carriers out there likeused to ten fifteen years ago. You know, everybody, everybody's kind ofdissect the Pie App we know what are their risk of appetite for this industryand you know, and one might say have we've had bad written, we'vehad a bad situation here and we're just going to get out of it andthey'll go do something else or state. You know. So I think overtime, all these insurance com we start to split up the pie to where, Hey, this is what we're good at, this what we're going todo. Unfortunately, the lack of competition in any of those industries will leadto higher rates. It's just the way the world works right. So that'sanother reason why as well. But what we're seeing more and more of thoseis business owners that run a good operation, understand their lost controls, have,you know, good have good safety. Mean do all the things are supposedto as a as a protection of their business from a bric an engagedSampoin, because nobody wants to have claims. I mean I make it very clearto clients there's never a good situation when you need to have an insuranceand thank God paid the premium. Never have a claim. Good on you, because you don't want to go through that right. So, but atthe same time those operations, though, we were finding is and you know, they're obviously subsidizing the ones that are the bad player. Not necessarily badplayers, I shouldn't say that, but more of their operations not as aswell ran as yours. But you're subsidizing those clients. It's just the waythe insurance world works. So what we're seeing with those types of clients wherethere are ready a good operation, they have low loss ratios and notes stuff, we're actually seeing them taking out a higher first dollar loss. And whatI mean by that is I think of a deducted want a car, right, if I have a five hundred duct to want to clusion car. Soif I'm driving the vehicle and I slide into a light pull due to iceor whatever, I think the first five hundred dollars of damage to my vehicle, my liability insurance will fix that l like for nothing. I don't haveto pay anything out to fix that light. And that's traditional insurances and that's howit works. What we're seeing in the commercial side, and order offset some of those premiums increases, the clients will and take out more risk. So now they may take on instead of a five hundred thousand or twentyfive hundred ductible for collision on to say, a commercial vehicle, they may wanta five or Tenzero, and that lowers their cost down, increases yourrisk for, you know, more out of pocket. And then, course, the first all loss on liability insurance. We're seeing a lot of that withproduct liability and we're also seeing a lot of the general ability insurance aswell, where they'll take on a higher... that US take on any doctorble. Now what that looks like is really the risk appetite to the client whenthey do in a willing to do a two, fifty a hundred thousand dollarrisk. Our first our loss. And is there an aggregate cap? Andyou know, there's some things mechanisms to it. You just going to havea runaway claim and have at risk of losing your business over a simple claim. But, all that being said, it's with our program what we do, though, is we allow you to build these reserves up, take thetax deferral program that they thirty will be allows you to do, and thenbuild up the surplus and reserves into your own your own vehicle, your owninsurance company base, is what we would call it. And now you can. Now you're in a position and take on better risk. You're using lastyear's profits to take care of this year's exposures and that's just good risk tominigation. That's just good business. You know, I know the PPP programwas big for a lot of business owners. I mean obviously that was huge lastyear when there was a huge slows down and most business owners were forcedto shut down. But you know, that's the government stepping in and basicallygiven out a program and giving out the money. But for my point ofview, I think most business owners out there that want to run their ownship and steering own way, if there's a tools like this available to them, I think it's they owed to themselves. So to definitely starting and look intoit and again, if you're having a good year, just to takeit a little bit off the top, Park it off to the side ona tax deferral basis, which means you're expensive out of your operating company insteadof leaving it in there, paying taxes on it and in now you now, stead of allocating a dollar for my warranty or allocating my dollar for myrecall policy or my cyber or all these other gap covers, unfortunately, thatbusiness owners have today, I can take this dollar now and expense it onmy operating company and I still have that dollar right the dollar still sitting inthe bucket over here. Well, you know, if I got to ifI have this happening, if I have to use this insurance company, it'snot a good day, I promise you. But would you rather fight the fightwith fifty cents are the on the dollar or the whole dollar? Andthat's really where that's a differentiator in a program. It gives you the abilityto manage risk more effectively. I tell our clients one of the best busbest compliments we get from our clients is that he may have been with yourcompany for a while. The one thing your company, something your product doesfor me that would. It just makes me sleep easier at night knowing thatthat money's Tuck off to the side and if we need it, we haveit available. I don't have to go to a bank get them bigger lineof credit. Our poll cashul from this one side of the company and,to put it, pump it into this one because we got a casual constrainover here because of a unforeseeing issue that came up. And again, youknow, Congress is interested in business owner staying open. I mean payroll taxesis a big part of their tax program is payroll tax small business owners tomiddle market business owners and large companies. I mean these are tools that areavailable to you that you may be hearing about it for the first time,but just know that it's been around for over thirty years and I can promiseyou this big fortune power can big companies have been new unized these tools literallyfor decades now. And so again I can't reiterate enough that just because itand it is still new to a lot of business owners, we believe asa company that this will become a normal business practice and I think, unfortunately, covid nineteen will probably drive that home with a lot of business owners thatthere are all things we don't we can't buy in Schuranceport, but we stillhave the risk. So how do we manage that risk more effectively? Andyou know, unfortunately taxes is part of that. I mean, if Ican avoid, if I can defer paying taxes today, and I know Ihave more of what's called a war chest, or it's a rainy day fund downthe road, if I need it, that's great. Now, if Idon't need it, I saw my business, I walk away, whateverhappens. I can only shut the insurance company down. And the Nice thingwith the sea corps it comes out as capital gains. Are Dividends. Nowyou may win in that scenario because obviously you know in s Corporal Lc you'reaver even the sea corps, all those expenses of mean tax at today's rates. Down the road we don't know what's going to happen with the tax thingright. I mean it's just it's doesn't...

...matter. It gets kicked around allthe time. Just it's just what it is. But certainly deferring tax istoday with the idea who if, in the event you need to have yourbusiness survived, it's it can be game changer. That's that's all really goodstuff. Van, you've sort of mentioned covid you know a couple times andone thing I wanted to ask you is, because you've mentioned it to me,is we were talking leading up to this conversation that the pandemic is broughtto light some gaps in traditional insurance and especially for manufacturers. What options dothey have to prevent this in the future? When, first of all, whatare some of these gaps and what options do they have to deal withthat stuff going into the future? Yeah, so I think from my point ofview on that would be the supply chain risk, I think is ais a glaring issue right now. You know, in the beginning everybody thoughtwe were going to have tremendous amount of supply chain risk, meaning the Chinawas shutting down. You know, there was going to be this huge,you know, slack. Now it wasn't as bad as I think people sawor you know what happened, unfortunately. I think this year's where we're goingto see the supply chain risk. Kid is more and it's really more inthe technology. I think good examples for right now is going to have toshut down that F one hundred fifty plants because they're not getting the chips theyneed to continue manufacturing the number one vehicle they sell. And you know that'sforward. You know what happens if you're a smaller business and you're defended onsome of these different chips and manufacturings are this, you know, called awidget or whatever you want, and there's this you know, it's kind oflike this rippling effect. You know what cause? One cause here, maybeunrelated today, but it doesn't catch up to you till four months later andit's still you know, the cause and effect. Happened when you maybe theythink it was going to. And so I think this year will be reallyinteresting from that. I mean to say this, but in risk management Iget a little geek down on that stuff and I find it somewhat interesting.I don't know if that's a sickness or what, but it's just the causeand effects of risk is is dynamic. I mean, as weird as thatset my sound a lot of your listeners. Yeah, so I think this yoursupply chain risk is going to be a big one. Continued, wethink, called continguency, business interruption. I think as natural capacitphies increase,just because my plant is not being affected doesn't mean the highways, the roadsystems, the bridges and everything are shut down, that I they can't getto me and I can't get the them. We've seen that. We've seen thatrecently with hurricanes, and that's always been there. But the contingency businessinterruption, I think it's a big one. I think political disk is huge todayand manufacturing, but you can deal with foreign governments, but it's alwaysbeen there for him. And then the other ones would be, you know, brand damage recall. Recall, I mean, and we know recalls achallenge today a lot of insurance. You Talk About Insurance Industry, where they'vereally you might only have less than three companies that offer recall, a real, I would say, robust recall policies where you think, okay, I'mgoing to be protected here in case we have to do a recall on aproduct that manufactured, you know you're down with three companies, which means ifyou have a serious claiming, you think the other two carriage you're going towant. What Your Business if you get, if you get nonrenewed by another recalland then you're obligoy. You know, most companies are contractually obligated for theirrecalls today. I mean, it's not target our cost goo out recallingyour product. You're doing it right, you're bearing that cost. And soagain, these are these are big issues potentially for business owners of manufacturing companiesthat in manufactures and distrivers that matter, that they they have exposure to.And so you know, unfortunately, it's not it's not like the insurance industrytomorrow is going to go out and say, Hey, Y I guess what,guys, we're going to write a policy is going to cover everything.Don't worry about it, because here's the problem with the insurance companies. Theyat some point you're not going to work just for the insurance company, Right. They can't just keep charging more and more premiums and then you're going tokeep buying their policies in the risk with war factor running your business goes outthe door. You got of other expenses out there and of all of asudden you got a thirty, forty, fifty percent increase on a line,and that was steady for the last ten...

...years. You know, some pointthe insurance companies you're not going to go to work for. You're not goingto take the risk you do as a business owner. So there's a pricepoint for them to so one way to many get that price point is byadding more exclusions. So I think one of the things you're going to seeafter this year's you're going to see more exclusions come into policies. There's throwsome challenges on a thing called business. So if you were forced to shutdown by a municipality or government, federal whatever, and you shut your plandown for two months, you you want to PPP, you got to beppto cover your payroll and did all those things. But let's say there wasother expenses right, oh, I don't know, loans on commercial buildings,all those types of things that came into play and the revenue was already strappedbecause it literally started happening right after the first year, which we know mostbusiness owners today, you know, at the end of the year they're tryingto create expenses and lower down their tax liability and in January one they getto start wars zero. Right now now we got to go on sale,manufacture and get the products going and now we got made profit. And whenyou look at last year that happened. They really start happening towards the endof the first quarter. So you now you're going in the second quarter.Now you're shut down and you didn't really able to build up your cash flowreserves and now you're hoping, you know, that the banks will cooperate with you, govern programs come out, all these other things. So there's alot business owners can do it. And again, I think this tax codeallows you to do a lot of things more effectively and efficiently. That linkinloves you sleep eature at night during these times of and and here's the thing, Joe. I don't think it's going to get easier or easier to mitigaterisk. I think if anything, risk is going to get ratcheted up.I think you're going to hear more and more about it. I think we'regoing to hear you know, these these tools will become more and more awareto business owners and I think you're going to you're going to see these typesof things come into playing and, like I said, it's going to becomea normal business like a formal case of normal business practice. You want toretain employees and creative retirement for yourself. We believe owning any thirty one Bplan is going to be no different than a form one k plan. Nowthat's not to say that there's lots of rules and regulations with this program justlike a one K. maybe not as complicated as for one K at time, but for one case been on the books longer, you know, butwith time a thirty one B will have a clarifications. There's been some issuesin the past. Want to make sure your listeners you know that are googlingthat task code. You know and I took make it very clear to themthat you know. Unfortunately, it was hijacked by a state tax attorneys thatwere selling it more not from mervous minty gates to standpoint like we've been discussing, but more from a state tax play for very wealthy individuals. Obviously theyhave a state tax issues great tax planning. But however, when the path hadbecame I think the law was signed on Obama and I think it becameeffective in the first year of the trump administration, there were some changes madeand the eliminated the estate tax play that you would have an early thirty oneB in and from a standpoint of a lineal descendants and the ever vocal trustand all that stuff. It became clearer and congress past that law and actuallyin the path act, so they eliminated at however, there's still some badactors out there, unfortunately, still preaching this more of a tax code savingsand arbitrizs and real missment, real risk mitigation, and my hope is withtime those people just kind of go away and let the risk managers actually makethis program effective and efficient for their business owners to recognize risk that they haveand how do you manage it more effectively, and he certainly should be doing itwith tax to Furul dollars versus after tax dollars. It just gives youa bigger war chest to fect to fight will van. Is there anything Ididn't ask you that you'd like to add to the conversation today? No,I appreciate the questions. I mean, like I said, you know,I think surprisingly and I shouldn't be surprised by it, but there are alot of business owners, and doesn't matter what level in the spectrum you are, gross revenant is a type of business and anything else, that aren't awareof these types of tools that are available to them, and you know Ihate that. Right. I mean, these are tools and and the Mayin for the right client. This is a great tool and that's all.This is right. It's a tool toe...

...chest. Doesn't make sense to doit or not? Do we recognize risk that we're trying to fund somehow withafter tax dollars, but wouldn't be better to use tax to Furul dollars firstand foremost, which a lot of that lies within the warranty? We're seeingmean more and more all the time. But the warranty aspect of you know, in order to be competitive you got to add, you know, youget very, very generous with these warranties and as even between suppliers or ifyou're if you're if you're B to be guy. I mean, in orderto compete out there, you got almost give the shop away to get theirbusiness. Unfortunately, and you know, because their own their own pressure ontheir into for the warranties. I mean we call nonmerstability warranty, which meansnothing's the product side effected. The customer, the incustomer, just didn't like itand whoever they bought it from has this open ended return policy that they'lltell our clients are doing it, but they're not the ones honor in it. If you want to do business with them, you got to be theone in the back room meeting it. And so again, these are thingssthat come up that you needed. You know, business owners aware IT'S Aand we've to we I can't tell you anytimes it's set in meetings where theysaid, I've always wonder how I can manage at risk more effectively. Ijust didn't know this is the way you could do it. And so we'vegot a lot of clients like that that I literally just came from an appointmentwhere the client was like, I didn't know I could do that, butdo you not mean times I was worried about how much sleep, sleep Iwas losing, and they were more related to service contracts and for cuss upcontractors and Labor warranties. This given your labor warranty out. Let's replace thatproduct and you know you got to eat it right as a labor warranty.But anyway, so that's that's kind of things that I would just bring upto is like, if you're out there offering warranties, you know, howdo you back those warranties up? Those you know, typically those are onfront of the abilities as well, and the terms are just getting further furtherout and it's like Whoa, that's a that's a risk. And I toldtold clients all the time warrant he's only become important when unfortunate the customer.Is You having a step back in life economically, are the economies is takena step back in general, that's when you're going to see a calls andincreases of warranty claims. Well, that mean if you if that's happening toyour customer, it's more likely happening you to your cashull has become a constraint. Meanwhile you're seeing now uses your warranty co up. Would it have beenbetter in a previous years, with times are good, just to put agive a little bit of profits off to the side the park and recognize thatrisk into the future and and just be more efficient with your business? Andagain, it's a great tool and for the right client it can be agame changer for him well. Van, I really appreciate you taking the timeto share your knowledge today. There were a lot of really great nuggets hereand probably some things that are the listeners could take away and that they theyweren't really aware of. So thanks for doing this. Hey, is mypleasure. Thank you, Joe. Yeah, so what can you tell our audiencethe best way to get in touch with you where they can learn moreabout SRA as well? Yeah, so we make it pretty simple our websites, thirty one BEATCOM. You just want to fact that in thirty one Beacomit will go right to our website and then, course, my team.I've got a team out there of professionals. We've actually had advisors all over thecountry that represent our products as well. So loving its information out there areI think that website, you know, does what it's supposed to do,supposed to give you information. There's plenty of videos to watch and allthat kind of stuff and, in course, on there you can find this directly. I think you hit the team and get the met email wise oralways your you know, our phone numbers on there and everything else. Soobviously go to the website, thirty one beatcom and your listeners and certainly startthere and if they have any questions or concerns, by all means reach outto this directly. Beautiful. Well, Van, what's again, thanks fordoing this today and as for the rest of you, I hope to catchyou on the next episode of the Manufacturing Executive. You've been listening to themanufacturing executive podcast. To ensure that you...

...never miss an episode, subscribe tothe show in your favorite podcast player. If you'd like to learn more aboutindustrial marketing and sales strategy, you'll find an ever expanding collection of articles,videos, guides and tools specifically for be tob manufacturers at gorilla seventy sixcom learnthank you so much for listening. Until next time,.

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