Merriam Webster defines:
RISK– possibility of loss or injury : PERIL
INSURANCE– An arrangement by which a company provides a guarantee of compensation for specified loss in return for payment of a premium.
COMPLIANCE-the act or process of complying (to conform, submit, or adapt (as to a regulation or to another’s wishes) as required or requested) to a desire, demand, proposal, or regimen or to coercion
RISK MANAGEMENT – The discipline of forecasting and evaluation of financial risks together with the identification of procedures to avoid or minimize their impact.
Unfortunate for grass roots cannabis businesses, varying “professionals” travel the industry using these terms interchangeably. If you are confused…don’t feel badly…you have every right…
As detailed by the definitions above, however, each are distinctly different with all having their place in a cannabis company’s strategy and business plan.
Let’s try to untangle this web…
Risk management or mitigation is fundamentally defined as taking an action to reduce the possibility of an event taking place. Insurance is designed to supplement these actions by financially transferring the portion of certain risks whose probability can’t be lowered to an acceptable level.
To further understand the differences between risk management and risk transfer, let’s look at the comparison below
Risk Management vs Risk Sharing
- Lowers the odds of a happening
- Keeps you whole
- Makes you better
- Partial compensation for damage if it happens
- Never, ever makes you whole
- Always creates a setback
Additionally, many risks cannot be insured affordably, and certain risks can not be insured at all. Take talent optimization for example. One of the largest risks facing not only the US cannabis market but American businesses in general is finding the right people, putting them in the right paces and retaining them. There is no insurance market that transfers an ounce of this risk. Risk management is the only route of control (SEE PRESS RELEASE LINK).
Similarly, typical cannabis insurance and other financial services products are “pricey” as a result of the much overplayed “external risk of cannabis.” This is in a time where loss claims are low because of the presence of substantial coverage exclusions in a market where demand significantly outweighs supply. The likelihood of losses and their associated costs increases without effective risk management and further increases coverage prices.
Based on the above, one can only conclude that…
Risk management without insurance is imperfect …but insurance without risk management is illogical”
Now let’s look at compliance. The definitions cited above clearly point to compliance as something that YOU do to satisfy SOMEONE ELSE. I am in no way stating that compliance is not important as it provides many of the tools required for successful operation. Compliance is also key in maintaining licensing status and conformance with any multitude of regulatory requirements.
Where compliance falls short is that it does not necessarily teach one as to what tools to use and how to use these tools in certain situations. This is where risk management comes in. Where compliance is the tool box, risk management is the real application of the right tools to solve a cannabis company’s problems efficiently, reduce their fixed and variable costs and enhance their profitability.
Hopefully this clears some of the confusion. Now take action to put your compliance investment to work by clicking on the link below and completing the NCRPS 5-minute risk assessment.
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