The Contingency Planning Process

Contingency planning is a popular term. It is generally used to refer to having a plan for coping in the event of a disaster, natural or otherwise. It is a plan for keeping business as usual no matter what happens to the extent that it's possible. Y2K was perhaps the most extensive contingency planning the industry has ever done.

Now, in the face of the lapse of the NFIP, we face a different but equally important contingency planning process: how to conduct business as usual when one of the key tools is not available and we don't know when it will be. In this situation, what does contingency planning actually involve and how do we do it?

There are several basic elements to contingency planning that are illustrated by the current flood insurance problem. First of all, with contingency planning, you aren't really concerned about the risk that something will go wrong. You assume that it will. In this case, it already has. As of January 1, 2003, there won't be any federal flood insurance and we don't know when there will be. We also don't know whether re-authorization will be retroactive, although reasonable minds assume it will be.

With contingency planning, you are looking at options for responding to the problem. You should find and consider all options. When all the options are identified, the question becomes the feasibility of each option. You also need to consider the advantages and disadvantages of each option. Finally, you need to chose one.

You can't do this alone. Contingency planning is necessarily a team project. As with Y2K, you begin with assembling the team. The team should bring the necessary information about the process or procedure and the organization. With the right team, you have all the information you need to anticipate problems and design an alternative.

Check off the following steps to develop a contingency plan:

Identify the problem. In the case of the NFIP, the problem is to assess safety and soundness risk of exposure. You may also want to consider customer service concerns.
Determine the impact the problem may have. In the case of the NFIP lapse, only loans secured by improved real property are affected. You can ignore deposits and unsecured loans. But both consumer and commercial mortgages will be affected.
Assemble the team. Then review the team and see if it covers all the information and issues. Add members as appropriate. For flood insurance, you need to have representation from the loan department that includes staff conducting and tracking flood hazard determinations. You also probably need someone from operations.
Evaluate risk, on the assumption that something does go wrong. In the case of flood insurance, evaluate the risks of making loans without insurance, refusing to make loans in flood hazard areas, or requiring private insurance.
For each element of risk, take the analysis the full distance. For example, in considering whether to make loans without flood insurance, consider the next consequence, such as force placing insurance when the NFIP is re-authorized.
Consider your alternatives and evaluate the pros and cons of each alternative. Proceeding without flood insurance is one alternative and it is easy. But don't forget to consider the disadvantages of this approach if flooding occurs.
In most contingency plans, customer service and customer expectations are a significant part of your considerations. For flood insurance, look hard at the issue from a customer's perspective. Consider this perspective with and without a flood occurring.
Look at other consequences. For example, if you need to establish a procedure for tracking loans that will need flood insurance, does that tracking process interfere with any other procedures or systems? Alternatively, can you use other procedures or systems?
When thinking about things going wrong, anything can happen. Have more than one solution.