State Farm Risk Register
State Farm has chosen to further to its already-existing operations in Canada, with the result of capturing millions of new customers. These customers will require both brick-and-mortar and telephonic support. Brick-and-mortar locations number in the thousands and continue to grow. With the acquisition of a greater number of customers, these locations will be able to absorb and support a respectable number of these new customers. Yet internal analyses indicate that the younger customer base, that is, customers in their 20s and 30s, prefer virtual or telephonic interactions and will actively shun brick-and-mortar locations. It is these customers who expect to receive timely answers to their questions telephonically. This customer demand is the impetus behind the company’s need to construct a new call center in Canada, specifically in Quebec.
Through a qualitative analysis, State Farm has identified eight risks:
1. Natural disaster,
2. Canadian government collapse,
3. Environmental clearance for call-center construction,
4. Canadian permit delays,
5. Differing site conditions,
6. Substantial currency fluctuations,
7. Substantially volatile oil prices, and
8. Labor strike.
Each risk will be treated further below.
Just as with other countries, Canada experiences natural disasters that are disruptive to both individual and corporate life. With the establishment of a call-center presence in the country, this naturally occurring phenomenon must be considered.
According to Public Safety Canada, which maintains a database of all natural disasters throughout the world, from 1950 to 2000, Canada has experienced 481 natural disasters, inclusive of floods, earthquakes, and tornadoes (Public Saftey Canada, 2012). These natural disasters have a twofold effect on State Farm’s call-center presence in the country:
1. Physical damage to call center, reducing likelihood of meeting customer-service needs 2. Increased exposure to claims from affected customers
If physical damage to the call center occurred due to an environmental phenomenon, customer support would greatly falter, since calls and service requests would not be answered in a timely fashion. This issue would also present an impressive burden to brick-and-mortar employees who would be required to absorb the workload until the call center achieved homeostasis. This risk is an obvious threat.
Natural disasters also will result in elevated claim submissions from customers. State Farm would be required to compensate for damaged homes and cars, thereby increasing State Farm’s exposure substantially.
This risk is deemed a medium threat with a very high influence on company profit maximization.
Fortunately, the threat can be mitigated. Increased costs of doing business engendered by a natural disaster could be offset by a gradated approach to premium increases in the country. Premiums would increase 15 percent during a three-year period, that is, five percent per year. This approach would gird profit maximization through bolstering the company’s coffers. (Possible premium increases in the U.S. could also be considered but would have to be approached sensitively.)
The executive leadership team and underwriting team are responsible for the management of this threat. Executive leadership is responsible for setting appropriate strategic policies in preparation for the risk, and underwriting is responsible for premium-increase implantation and monitoring company coffers.
This risk will be subject to quarterly evaluations.
Canadian Government Collapse
All countries are subject to the total failure of government and resultant collapse of society. The likelihood, however, varies among countries surveyed. The source of collapse always is because of the government and its inability to manage the society under its purview.
During the past 100 years, there is no record of a government and societal collapse in Canada, though there has been unrest at various points.
If this event were to occur, State Farm would suffer extreme exposure, as every customer would be somehow affected by such an event and would demand recompense, understandably so. Government collapse would also affect call-center and brick-and-mortar operations in the country, leaving customers without recourse to file their claims.
This risk is an obvious threat and, certainly, poses a very high risk. Fortunately, the likelihood of such an event happening is very low, since Canada’s society has no history of collapse and is governmentally well managed.
Still, in the event of such an event’s occurrence, State Farm must have a mitigation strategy in place. The primary focus of this strategy is to remain connected to the Canadian government, possibly through lobbying efforts. Doing so could provide the company notice of impending government issues. State Farm can also bolster its American division through premium increases and the institution of greater policy limitations to bolster coffers to support meeting this Canadian risk.
Due to the likelihood of this event, annual monitoring would only be required.
Clearance for Call-Center Construction
State Farm must receive the appropriate clearance from Canadian authorities to complete the construction of the call center. Building codes are mandated by the local and national authorities to verify undue pejorative influence on the environment and surrounding culture.
Seeking to meet the rigorous requirements of these building codes is identified as a threat and will increase the costs of the construction project. The likelihood of not being able to meet the requirements of the codes is very low; however, the influence of not meeting these codes is very high, since, in a worst-case scenario, the government would not approve the call center to be constructed, which, of course, would affect customer-response rate for newly acquired customers.
This risk can be transferred to the onsite contractor and project manager, since it is their responsibility for mitigating these risks and meeting the timelines set forth for completion of the project. These contractors are required to provide a progress report every other week.
Canadian Permit Delays
Similar to building codes, State Farm is required to have a permit to operate the call center. The source of this permit requirement is the local and national Canadian authorities. The influence of not appropriately managing this risk would be, in a worst-case scenario, the inability to complete construction of the call center. If the call center were successfully opened but a permit expired, the government may require the call center to close until permit issues have been resolved.
The principal concern with not managing this risk is the imposition of massive fines on State Farm. A secondary concern is the closure of the call center if the permit cannot be procured.
The likelihood of this risk is low, considering State Farm has successfully constructed call centers in other locations that had substantially greater stringent requirements. However, the influence of an inability to meet permit demands would create a very high negative influence on company profit maximization.
Just as in the preceding threat, this risk can be transferred to the contractor and project manager for the construction of this site. They are responsible for understanding and meeting permit requirements. Just as above, the contractor and project manager are required to provide progress reports every two weeks.
Differing Site Conditions
After construction, information-technology concerns will be the focus. The local technology infrastructure may offer limitations to what the company has handily deployed elsewhere throughout its operations, or there may be manmade obstructions preventing the implementation of standard information-technology tools that are the locomotion to State Farm’s other call centers.
This risk can substantially increase project costs, since the search for a compatible information-technology solution would be required, or any manmade obstructions would have to be removed.
This risk is considered a medium threat but with a low likelihood of occurrence; information-technology standards are mostly uniform throughout the world. It is medium because of the moderate negative financial influence to the company; it is a low likelihood because the information-technology tools could be easily obtained and employed in the local area.
The latter is a mitigation strategy—the acquisition of tools to implement the differing technology locally. However, before the construction of the call center, substantial analyses can be conducted to determine the risk and the ways to surmount it. Once again, the local contractor and project manager are required to manage this risk and should provide monthly progress reports.
Substantial Currency Fluctuations
The fluctuation of the Canadian dollar can introduce considerable uncertainty and increased costs of doing business in Canada. Any fluctuations in the country’s currency will be caused by worldwide stock-market changes. Such an event would be considered a low threat with a medium likelihood of occurrence.
The reason it is low is that the Canadian dollar has demonstrated itself to be stable and not subject to substantial currency swings. Yet if such an event did occur, the negative influence on company profits would be demonstrable, since non-favorable currency fluctuations would cause State Farm to pay more to operate a call center in the country.
This threat can be mitigated to some extent. A principal way of mitigation is by establishing forward contracts. Forward contracts are agreements with contractors and vendors to set non-volatile rates on services rendered. In such a case, regardless the currency fluctuations, State Farm would only be required to pay the same amount. In consideration of the construction of a call center, a forward contract may be set with construction vendors or even call-center employees. It should be noted that forward contracts are truly effective in environments with minor currency fluctuations.
The executive leadership is responsible for managing this risk. Executive leadership is required to set appropriate policy in anticipation of financial fluctuations. It is required to monitor the financial landscape.
Volatile Oil Prices
State Farm is an insurance company, primarily of automobiles. Obviously, oil prices affect the sale and operation of vehicles. It is assumed that the lower the oil prices, the greater the number of vehicles consumers will purchase and the more driving they will do. This driving will require that they be insured. When oil prices vacillate, they do so because of the actions of oil producers and the perception of the value of oil by the worldwide commodities market.
When oil prices increase, vehicle purchases decrease and, certainly, the need to drive decreases. Some consumers may even choose to primarily rely on public transportation and will remove insurance from their vehicles. With fewer drivers with less of a need for insurance, the loss in subscribership could negatively influence the need for a call center in the country at the outset.
Such a risk is considered a medium-level threat with a high likelihood of negatively influencing the company’s coffers. It is considered medium because vacillating oil prices have occurred for the last decade, so State Farm has built financial models to account for such uncertainty.
To appropriately mitigate against this threat, State Farm should continue to refine its strategies to account for oil-price vacillation. It should also consider creating a plan to adjust for a marked increase in the price of oil, which could have a substantially negative effect on the country’s driving habits.
It would also be beneficial to invest funds into greater research in eco-friendly modes of transportation, such as high-powered scooters, clean-burning cars, or electric vehicles. With greater access to these and with the perceived cost savings to the public, it is possible that driver-ship could increase to levels unseen. These drivers will, of course, require insurance that State Farm can offer. This offering provides the company with higher levels of premiums paid.
State Farm also has a banking division. To offset lost revenue for insurance products, the company should also consider investing more in its banking strategy in both the U.S. and Canada. Increased gains there can minimize risk in the insurance industry. It should be noted that focusing on increasing the banking presence and lobbying for eco-friendly driving options are not mutually exclusive.
The executive leadership, banking, and underwriting teams as well as lobbyists will be required to manage this risk. The executive team should set forth strategies to focus on the promotion of eco-friendly options. The banking team should set policies to bolster the number of bank customers. The underwriting team should set policies to increase premiums to offset for volatile oil prices. Lobbyists can keep State Farm connected with the government to promote the company’s mission and influence politicians to make decisions favorable to the insurance industry.
All risk-responsible teams should present a monthly update on the changes in oil prices.
State Farm is committed to creating a healthy environment in which employees feel comfortable working and being productive. However, with the addition of a call center in Canada, there is the potential for a labor strike with American call-center workers. The likelihood of such a strike is low, but the negative influence on the company would be moderate.
The reason for the low likelihood is that the call center in Canada will primarily support Québécois, that is, Canadian French speakers, with only one-quarter of the center supporting English-speaking customers. Still, with the considerable concern of outsourcing that is embedded in the American culture, American employees may view this new construction as a concerted step to eventually replace their positions with so-called “cheaper overseas labor.” The employee action in response to this fallacious perception could cause substantial disruptions to the servicing of American customers, to such a level that brick-and-mortar locations would not be able to keep pace with the demand for assistance with claims or with service requests. Also, the U.S. government’s tone toward perceived outsourcing tends to be negative. A State Farm U.S. labor strike may invite unnecessary government attention, causing a disruption in service.
A mitigation tactic should be openly sharing the company’s expansion intentions with American call-center employees. Doing so creates an environment of openness and can give the employees a sense of stability. When they feel that they work in a stable environment, they will be less likely to strike and more likely to remain efficient in their work habits.
Another mitigation tactic would be to ensure that current government employee mandates are stringently adhered to. Lapses in human-resources management policies can subject the company to increased government scrutiny and fines, and can provide substantiation to employee outsourcing concerns. Ensuring that call-center remuneration packages are aligned with those of the company’s competitors is an ideal away to mitigate against striking.
The human-resources team is the responsible entity for this risk. This team is required to perform semi-annual total-rewards reviews and report on recommended changes.
Public Saftey Canada. (2012, January 10). Canadian Disaster Database. Retrieved from Public Saftey Canada: http://www.securitepublique.gc.ca/index-fra.aspx