Acacia Insurance & Risk Services recently spoke with David Hubbard from CINCH Transform about the unique risks facing not-for-profit and purpose-driven organisations.
CINCH Transform is a not-for-profit and NDIS provider transformation specialist. They’ve completed 124 transformation projects over the ten years they’ve been in business, resulting in a further 10,125 people in need being supported. Their transformation process covers everything from organisational review, understanding unit costs, assistance with NDIS claiming, leadership coaching and change management to boardroom level reporting, analysis and continuous improvement projects.
David, a seasoned chartered accountant, founded CINCH Transform. He’s also authored a book (The Key to a Thriving NDIS Organisation) to help NDIS organisations help more people.
“In addition to the commercial or corporate lens, what we bring is also compassion for the people our clients are serving. It’s not just about profit and making money, it’s about the purpose and building a sustainable business model,” emphasises David.
“The not-for-profit space should theoretically be able to operate quite sustainably as they don’t pay corporate taxes and things like that. There’s a lot of passionate people in the not-for-profit and for-purpose space, but they’re not always equipped with corporate experience and knowledge in how to improve systems and processes to be more efficient and keep the focus on the outcomes they’re designed to deliver.”
What are some of the current risks that not-for-profit clients face?
“One of the biggest risks we’ve been seeing is introduced through an increase in merger activity in the not-for-profit/for-purpose space. Some organisations may be losing money, so in their balance sheet they’re using cash that they’ve had in prior years and the implications of that aren’t being picked up in their accounting, and therefore not being taken into account in their business strategy for the year ahead. Particularly with mergers, each organisation doesn’t understand the risk they’re taking on, for example with workers compensation insurance and the risk of incidents that may have happened in the past but claims are only being made in the present,” says David.
Acacia Insurance’s Head of Workers Compensation Services, Robert Wallace, highlights: “Regarding workers compensation, where a company is acquired and merged, the vendors prior claims history is also included in the calculation of future workers compensation premiums. This can result in significant unbudgeted increases in premium which can take up to six years to clear.”
Underpinning the risk is largely an education piece – organisations may not understand the implications of insurance contract fine print when they go to merge, or what the impact might be on their premiums in the event of a workers compensation claim.
Most of the time they’re getting legal advice and support but these aren’t necessarily legal issues that would be identified through the process. The merger could be perfectly legal but the parties may still not be aware of the insurance and financial risks of the activities, products, people and assets that they’re taking on.
“Occasionally we also see these for-purpose organisations try to help support a smaller organisation and assume these relatively unknown risks rather than let them go through a liquidation process where these types of risks could be managed and contained. We’ve been involved in a few of these liquidations and sometimes it can end up being for the greater good for the organisation and the people they serve, as long as they can manage a continuation of service,” adds David.
“If continuation of service isn’t managed well, that’s where we can see some major disruption, but if the liquidation can help support a transition and manage the risks then it can be one of the better outcomes versus the organisation just winding up, or from a risk perspective if it’s just transferred into another organisation without due process.”
It could be as simple as getting an insurance contract review to better understand the exposures and implications, and assist with the due diligence in regards to insurance and risk management.
What’s an area not-for-profit clients should pay more attention to?
“There’s a lot more attention around cyber risk now, and not many of these organisations would have standalone cyber insurance policies,” notes Acacia Insurance Director Martin van Rhoon. “One thing not-for-profits and for-purpose clients might not know is that you must demonstrate significantly stronger cyber risk management policies and procedures to even qualify to get cyber insurance these days. And those policies and procedures need to be set up and followed properly or the claim might not be valid.”
Acacia Insurance recently did a deeper dive into this risk in the article Demystifying Cybersecurity featuring expertise from Solis Security that has some good tips on where to start.
Physical, mental and psychosocial risks
On the workers compensation side of things, there can be impacts on employees in the physical environment as some of these organisations can involve significant physical demand and wear and tear on employees where they’re lifting people or working to improve movement, or people in their care might have violent outbursts that results in injuries.
There is new legislation around employers’ obligations to manage psychosocial hazards that now must be actively managed as well.
“Since COVID, we’re hearing that mental health claims have also increased dramatically and they’re more expensive to manage compared to a physical claim because they can last a long time and people internally may not know how to deal with them,” says David.
“This is why we look at team dynamics and helping create a culture where people are working well together and feel safer in their environment, hopefully resulting in being less likely to bottle things up and thus reduce the risk of these mental health concerns.”
Management liability risks
The Royal Commission into Violence, Abuse, Neglect and Exploitation of People with Disability made 222 recommendations on how to improve laws, policies, structures and practices to ensure a more inclusive and just society that supports the independence of people with disability and their right to live free from violence, abuse, neglect and exploitation.
David’s observed that in some areas, such as northern Queensland, some insurers are pulling out of risks altogether, such as foster care. This is due to large abuse, neglect and sexual abuse claims and court cases that occurred on the watch of not-for-profit and religious organisations.
“This stems into the management liability of directors – they need to be aware and assured that the policies, procedures and the right team is in place to manage anything happening on the frontline of the organisation. There needs to be checks and balances in place to avoid some of the horrible situations we’ve seen in the headlines, where people have been left unattended and passed away.
“And not just for employees, the chain of responsibility needs to extend through contractors and subcontractors as well. If the customer is in your care, and someone else is providing that care, there’s still a liability.”
Managing your management liability risks
Risk mitigation then isn’t just about systems but the whole supply chain, making sure good governance, processes and insurance solutions are in place.
“Some directors get insurance and think, ‘oh, we’re covered’ but if there is a claim and it can be proven that they haven’t got the right systems, didn’t attend meetings and don’t understand the financial position of the organisation, then they could still be liable and the insurance policy may not respond,” adds David.
“One important element to get right is diversification of skills on the board, which can help improve risk management. If people on the board are not financial, they still need to know their numbers and know what they’re looking at in a boardroom, you can’t hide behind the fact that ‘well, I can’t read a financial statement’ or ‘I didn’t turn up to those meetings’ anymore. It’s your obligation to know or find out.”
Those organisations that are actively taking part in understanding and mitigating the risk tend to be better placed to manage issues or claims that may arise, but in a benchmarking survey that David’s team did of 30 not-for-profit organisations, only one was actively managing their risk, workers compensation exposures and cases with employees and their teams. That organisation had the same number of claims to a similar size one (approx. $50m turnover) that did not manage its risks well, and the proactive organisation had nearly 90% of its claims accepted whereas the more reactive organisation only had about half of its claims accepted.
Growth, on purpose
David notes that nearly all the not-for-profit / for-purpose clients he works with want to grow, and help more people.
“It’s really up to the boards to understand their risk profile and what their actual appetite for risk is before they start to look at their strategic planning. Not all risk is bad risk, you need to have balance and understand your numbers so that you’ve got clarity at a board level on what an acceptable risk is and where the limit is. Once they’ve got that happening, they can really empower their leaders to make decisions and enable high performing teams.”
The information in this article is general only, it doesn’t take into account your business or situation. You should speak to your insurance adviser or insurance broker about your needs before making any changes or decision. As insurance advisers, we are not authorised to and unable to provide you with legal advice and this article does not purport to do so. We recommend you seek independent legal advice on any matters in this article that might concern legal matters.