Five Essential Tools of Self-Storage Risk Management

Risk management can help you make money or protect you from losing money. In a November 2008 Inside Self-Storage webinar, Paul Cardamon and I talked about risk management in the self-storage business. This article begins to explore what risk management is and looks at some of its standard tools.

The recent ISS webinar addressed two types of risk: speculative and pure. Pure risk deals only with the opportunity for you to lose, or at best, maintain your financial position before a loss. This is the type of risk dealt with by the insurance industry.

Speculative risk, on the other hand, is what most of us think about when we think of risk. It’s the ability to make or lose money, based on a number of factors including chance and our personal risk tolerance. Examples include investing in the stock market, betting on a horse race or starting a business.

Why is speculative risk important and what does it have to do with running a self-storage company? Its relevance has to do with the distinction between a “known” risk and an “unknown” or “unintended” risk. Examples of known risk include: Is my property up to code? Is it well maintained? Do I have adequate security? Unknown or unintended risks include: Am I over-leveraged? Do I have the right kind of insurance? Who do I have working for me?

Speculative risk may involve some of the same analysis, but the chance element is more like gaming than the insurance business. When we deal with “pure risk” in the insurance business, it is based on a large body of experience and we can assign probabilities of loss that translate into premiums.

While we can’t predict the exact time, place or financial impact of any one loss, the insurance industry can set a price to accept the risk based on the law of large numbers (i.e., the number of building fires for a specific area over a given time period for a specific type of construction, and their resultant financial losses). The insurance industry measures probability, frequency and severity of a loss to determine how best to fund that loss (using premium), to bring you back to where you were financially before the loss.

The Five Tools

Risk management is the practice of applying tools developed to reduce the chance of loss. Properly applying these tools helps reduce the disruption a loss causes your business while helping keep the costs of insurance reasonable.

In self-storage, risk-management concepts apply not only to your buildings, roofs and driveways, but also to your maintenance practices, property security, operational procedures, records management, hiring practices, safety procedures, financial controls, disaster-recovery plans and lease language.