June 2011
I remember watching Mr. Magoo since childhood. When I view this comical video today it makes me seriously contemplate the "near miss" accidents or injuries that may occur at the workplace on any given day.
On that topic I frequently contemplate the following matters:
- How often are we "blinded" by what we perceive to be a safe workplace environment when the reality could be very, very different?
- How do we identify the potential "near miss?"
- How can we frame the issues and put risk controls in place to minimize the "near miss?"
I like to apply these issues using the 7D Process:
- Data
- Discuss
- Debate
- Decide
- Do
- Deliver
- Debrief
This is the fifth article in a five-part series on understanding the total cost of your insurance program. Preceding articles in this series can be found here: Part 1, Part 2, Part 3, Part 4.
Conclusion
It has been purported that carrier and broker Risk Control services are redundant, but I think now that we’ve taken you down the respective path, it is easy to see significant differences that are applied to reach the similar goals of loss reduction or loss elimination. Our clients needs vary so greatly and our resources and capabilities also have their contrasts, so much of what can and will take place has to do with the needs of the individual customer and the capabilities of insurance partners they are connected to.
We hope that if you are a user of insurance services that you are a better informed user and consumer. If you are in the business we hope that we have expanded your horizons and giving you some things to think about that will help you do your job more effectively.
This is the fourth article in a five-part series on understanding the total cost of your insurance program. Preceding and subsequent articles in this series can be found here: Part 1, Part 2, Part 3, Part 5.
As an illustration of the principles discussed so far, we offer these service level guidelines which have been developed by InterWest Risk Control for both Property & Casualty and Workers' Compensation clients:
Property and Casualty Service Level Guidelines (not including Workers Compensation)
Due to the significant variable revenue levels generated from either a mono-line or multiple lines of coverage (fire, inland/ocean marine, boiler/machinery, general liability, products liability and completed operations, auto liability, etc.) any client generating at least $10,000 in revenue would qualify for risk control service.
This is the third article in a five-part series on understanding the total cost of your insurance program. Preceding and subsequent articles in this series can be found here: Part 1, Part 2, Part 4, Part 5.
The Broker Risk Control Perspective
So your insurance carrier’s risk control consultant and insurance broker are providing you with all the safety and loss control assistance they promised they would prior to renewal to help eliminate and minimize your alarming insurance costs. Therefore, why bother with the broker risk control services? Not so fast!
Historically, carrier risk control services were driven by premium size, class of business, and/or loss frequency/severity — usually directed by the underwriting department. However, in today’s unstable and downsizing economy, all three entities — customer, insurer, and broker are all expected to do more with less.
Now more than ever, customers need to understand their Total Cost of Risk (TCOR). In C.R. "Rob" Ekern’s book "Consultative Brokerage: A Value Strategy," the TCOR model states four crucial cost areas: Insurance Premiums, Loss Costs (direct and indirect), Administrative Costs, and Premium Taxes and Fees. By adopting the TCOR model, clients can measure the effectiveness of their entire safety and risk management programs and not just the premium costs. Research has shown for every $1 paid out in direct costs, an additional $1-4 of indirect loss costs are paid by the client.
This is the second article in a five-part series on understanding the total cost of your insurance program. Preceding and subsequent articles in this series can be found here: Part 1, Part 3, Part 4, Part 5.
Now that we know that "how a customer is treated" and "how they feel about it" may well easily compete with the product or service itself, let's move on to our next parameter — procedures. What we mean by procedures is what we do and how we go about it. As an example, let's look at things Risk Control can do regarding the area of General Liability and Property services.
Liability exposures can exist anywhere in a business. So a comprehensive loss management program would include a process to identify and manage risks to the company and the public. Risk control can help the client identify and focus on the hidden, if not obvious, exposures that cause liability-related losses.
General Liability Risk Control services of this nature might include but are not limited to the following:
- Completed Operations Exposure Evaluations
- Contractual Risk Transfer Program Evaluations
- Construction General Liability Exposure Evaluations, including work zone safety, utility damage disruption prevention, water and fire damage prevention, dust control and construction defects prevention
- Emergency Plan and Disaster Recovery Evaluations
- Life Safety Evaluation based on the NFPA 101 Guidelines for Fire Life Safety Codes
- Premises Liability Exposure Evaluations, including slip and fall prevention and negligent security
- Products Liability Program Evaluations
- Quality Control Program Evaluations
- Workplace Violence Prevention Program Evaluations
This is the first article in a five-part series on understanding the total cost of your insurance program. Subsequent articles in this series can be found here: Part 2, Part 3, Part 4, Part 5.
Introduction
Risk Control can be defined as a multidisciplinary approach in which human, engineering, and risk management practices are employed to reduce the frequency or severity of losses. From an insurance company perspective, this would apply to real or potential losses associated with coverage(s) or covered perils provided for in the insurance contract or insurance policy.
The Carrier Risk Control Perspective
As we take a look at this topic, let's start off by identifying “What Insurance Related Risk Control Services Are.” They can be summed up for the most part in the definition of a service team. The purpose of the Service Team is to evaluate risk quality and assess our ability to be successful in underwriting, servicing, and retaining an account. What may not be so obvious in this statement is the business stance of the insurance carrier. We need to do whatever it is that we do in a way that yields a profit for our company with an interest of servicing and retaining accounts that can help us achieve that.
This speaks to efficiency, efficacy, and a focus on what types of services or activities drive profitability for carriers. Efficiency because we don’t have unlimited resources to throw at an account. Efficacy because we need to be able to produce a desired result, and we need to know how to do that in a focused manner that achieves the desired results while sanguinely endearing the client in a mutually beneficial business relationship.
Now that the business perspective is clear, it is important that we understand the roles, goals and procedures in play when these types of insurance services are involved. Oftentimes, due to the varying player's actions (different carriers) and the individuals (risk control personnel) involved, these parameters can become blurry. What we will achieve from taking a look at these areas is clarity of roles, perspicuity of expectations, and as even a playing field as possible given an environment where some players are trying hard to differentiate themselves in the marketplace. Let's take a look at the function of the three major players on the insurance carrier side of the equation.
Does the recent string of catastrophes from New Zealand to Mid America to Japan matter to me and my Insurance Program? Should I worry about the impact and record breaking cost of these events? Currently the cost estimate is over 60 Billion dollars and counting. As with so many things in a global environment, are all of these events related and will they have serious implications for insurance pricing in the future?
The simple answer? Yes, they do. Insurance at its core is the ability to collect premiums from many businesses such as your local operation and many thousands of other small to medium size businesses and use those premiums to pay losses for the group. The insurance carrier has to charge a premium that not only is sufficient to pay smaller routine losses, but to also bank premiums for the large multi-billion dollar losses that can occur on an infrequent basis. Every carrier has to predict the potential loss that they could be exposed to from any source and make sure they have the financial strength to pay those claims. No one carrier, no matter how large, is able to take 100% of any loss or losses that might happen without facing financial insolvency. The solution to that problem is to purchase what is called reinsurance. In essence, each carrier pays a premium to another carrier for protection against a truly devastating event such as happened in Japan.
Each year, the corporate risk manager scrutinizes workers' compensation excess insurance proposals from one or more insurers, trying to figure out the cost-benefit of the company’s self-insured retention (SIR), such as $250,000, $500,000, or even much higher. The “SIR” terminology applies whether the company is utilizing an insured high deductible, captive or legally self-insured workers compensation program. As we all know, claims below the chosen level of retention are “retained” (paid for) by the entity, not the excess insurer. And despite what level of self-funding is chosen, the risk manager gambles that the company’s injury/illness prevention program and competitively safe working environment is going to beat industry statistical odds. Why buy insurance on something that has little likelihood of occurring anyway? Your hope is that the premium money you save choosing a higher deductible will more than offset the claim costs associated between a lower and a higher deductible / self-insured retention.
With that decision made, the risk manager then dutifully works on an annual operating budget to project the direct and allocated costs of the entity’s “expected” workers’ comp claims, including excess insurance. With that task done, the workers comp risk factors have pretty much been addressed, right? Not really. The unaddressed factor in this self-insured/high deductible scenario — which goes up most corporate ladders to the CFO or Treasurer — is the issue of collateralization. Collateral, by definition is that which serves as protection for a lender against a borrower's default (failure to pay an obligation).
There has been continuing discussion about “Obamacare” and what the reformed system will look like. The controversial June 2011 McKinsey article suggests that as many as 30% of employers will definitely or probably stop offering employer sponsored insurance after 2014. This somewhat surprising result is much different than initially suggested by the Administration or other forecasters. Price Waterhouse Coopers (i.e., PwC) released an article in June suggesting that healthcare will soon become 20% of the GDP. One thing very clear is that there continues to be significant uncertainty and controversy about today’s health care system and the anticipated cost of it.
The continued increase in health care costs encourages employers to rethink their health care strategy. Recently we were approached by a major international company asking us to take a look at their health care offering and help them estimate costs of continuing it under a reformed health care system. They are seriously considering terminating the program worldwide, and paying the benefit penalty to be assessed by the Federal Government. Without transferring this risk to their employees they are questioning their ability to survive financially and compete in the marketplace. Although the analysis is not complete, they are prepared to end their health benefits to improve their financial outlook even if this results in financial penalties.
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Whether it’s Healthcare, Worker’s Compensation, Property & Casualty, Auto, Sophisticated Life Insurance designs, Directors & Officer’s, Safety, Risk Control or other Claims Management, Insurance Thought Leadership promises to deliver the most relevant mind share the industry has to offer.
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Dave Dias
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