Published Dec 29, 2022 by Risk & Insurance

From the state of the market to increased cyber risk, here are four challenges nonprofit organizations should keep in mind as they move into 2023.

Every quarter of society was presented with challenges that began with the COVID-19 pandemic, and the nonprofit sector was no exception. Ongoing economic volatility has placed even more strain on nonprofits as they face greater demand for their services, disruption of operations due to labor shortages and uncertainty over funding.

Through it all, nonprofits have continued to provide essential services — services that, in many cases, the for-profit sector doesn’t address.

According to a 2023 Nonprofit Outlook report from HUB and other sources, here are some of the risk management areas nonprofit boards and staff will need to have their eye on as we move into 2023 if they are to survive and thrive.

Challenge No. 1: Economic Viability

Nonprofit organizations, especially in the health and human services (HHS) sector, have experienced an increased demand for their services over the past few years due to the COVID-19 pandemic.

While numerous nonprofits saw an accompanying surge in federal funding and donations, they are now challenged with finding financial stability as that federal support and other funding streams taper off.

Given that inflation reached a 40-year high in June and the S&P 500 is down 15% year-over-year, donors are pessimistic about the economic forecast. While the amount of money for crisis-related causes rose, the number of donors resumed a more than 10-year decline in 2022, according to Independent Sector’s Health of the U.S. Nonprofit Sector Quarterly Review, released in September 2022.

U.S. nonprofits, a valuable contributor to the economy, added $1.4 trillion in the second quarter of 2022 in fees, service charges, government payments and philanthropy, as reported in the Health of the U.S. Nonprofit Sector Quarterly Review. While nonprofits contribute significantly to the economy, most have limited resources.

Finances have been further strained for nonprofits that dipped into their reserves or borrowed to get through the pandemic, The Urban Institute reported in Nonprofit Trends and Impacts 2021. The financial pressures experienced during inflation include reduced donations, shrinking government funds and rising operating costs.

From an insurance perspective, directors will also need to plan for increased insurance rates, including cyber, automobile, general liability, property insurance, and umbrella and excess liability, as HUB forecasts in its Nonprofit Industry Rate Outlook.

When resources are tight, the focus should be on innovative solutions to achieve efficiency. HUB encourages organizations to align with partners across nonprofits and even across sectors to leverage their paid and voluntary workforce. Following best practices in fundraising will always include diversifying funding sources, but efficiencies can be reached through partnerships with complementary nonprofits to maximize the pool of potential donors.

Nonprofit leaders would be wise to develop a communication strategy to pinpoint and reach their target audience. To remain relevant to donors, nonprofits can leverage technology, identify the appropriate medium and utilize social media to engage supporters. They can also create additional giving opportunities through storytelling, testimonials, pictures and graphics that communicate measurable outcomes to demonstrate impact.

Challenge No. 2: Talent Shortages

Nonprofits as a sector are the third-largest private employer in the U.S., with 12.3 million employees — 81% of whom are in health and human services, reports Independent Sector in its Quarterly Snapshot.

Employment in the nonprofit sector fell by 1.6 million during the pandemic, according to HUB’s report, then decreased further during the Great Resignation. In addition, the tight labor market increased talent competition, leaving a large number of nonprofits short-staffed.

The pressure on nonprofits intensified as “concerns about COVID-19 exposure and public health safety measures” resulted in a national decline in volunteers willing to give their time, according to a January 2021 Gallup report. Volunteerism is still below pre-pandemic levels as people continue to worry about their health, vaccine protocols and sanitation practices, according to Gallup.

Understanding the most common reasons for employee departure can help leaders to address the issues and implement solutions. As Forbes reported, the top reasons for voluntary exits in nonprofits included that 49% of these employees found better opportunities and 44% lacked opportunities for career growth in their former positions. An additional 32% left for better pay and benefits.

Another disturbing workforce trend in the sector shows a loss of racial and ethnic diversity, resulting in a 5.7% drop in Black employees (to 12.2%) and a growing proportion of white workers (now at 77.8%), as reported in the Health of the U.S. Nonprofit Sector Quarterly Review.

To compete with the public sector, nonprofits will need to pay market-rate salaries and should adopt a benefits strategy that includes health insurance, disability and retirement plans. Efficiencies can be reached within organizations that provide group insurance as a membership benefit and by allowing employees to personalize their benefits.

To prioritize the wellbeing of their workforce, nonprofits will need to address employee burnout. Internal policies and recruitment strategies that are intentional about racial equity and diversity will also need to be implemented.

Additionally, investments should be made in professional development to provide pathways for career growth. By applying best practices in wellness and work-life balance — such as hybrid work, flex time and additional paid time off — nonprofits can improve their value proposition to attract and retain excellent employees while providing opportunities to engage in meaningful work.

Challenge No. 3: Increased Cyber Risk

Nonprofits leveraged technology to increase efficiency in response to the pandemic when staff moved to a remote working environment. The increased use of technology for cloud storage, meeting rooms and fundraising platforms to process donations or event registrations, however, will require investments in digital literacy, hardware and ongoing operating costs.

Increased use of technology also brings increased cyber risks. Nonprofits that are less technologically savvy will need to understand how to safely use these systems to protect their data and ensure privacy.

Cyber insurance rates for many nonprofits soared in recent months and years as organizations with inadequate controls suffered system shutdowns and breaches that resulted in the loss of personally identifiable information.

HUB’s report indicates that nonprofit organizations will experience cyber insurance rate increases of between 20 and 40% in the coming year. Organizations with weaker controls could be looking at difficult renewals and are encouraged to speak with their broker at least 90 days prior to policy renewal dates.

Boards and staff will need to define their risks and take proactive steps to mitigate their cyber vulnerabilities. HUB reports that multifactor authentication, endpoint detection and response and background screening will be crucial risk management tools now and in the future. The brokerage also advises that managing third-party vendor contracts with access to data can “further offload risk and protect the organization in the event of a breach.”

Challenge No. 4: Resiliency

HUB reports that many nonprofits were damaged in the pandemic because they had no contingency plan in place.

Nonprofit leaders have been tested these past three years with increased demand for services, loss of revenue, staffing shortages and an increasing reliance on technology in a changing work environment. Establishing regular reviews of strategies, procedures and insurance policies will help boards and executive directors invest in their people, systems and programs to better serve their communities in the future.

In addition, according to HUB, organizations that implement an enterprise risk management plan to proactively understand and address underlying causes will improve their resiliency.