Download

The Total Cost of Your Insurance Program, Part 5

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.|

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. Well-planned and executed Risk Control services provide added value to any insurance program, and when embraced by the client can ensure stable ongoing operations that can survive tumultuous times. What is the immediate outlook for both carrier & broker perspectives on the future of risk control services? And how risk control consultants can prepare themselves for future insurance industry developments and grow professionally is up to us to create and prepare for. Bibliography Batterson, L., Oldham, M., Sullivan, C., "The Triangle of Risk Control Services," American Society of Safety Engineer's Risk Control Symposium, C.N.A. Insurance Company, Chicago, IL, October 2008. Ekern, C.R., Consultative Brokerage: A Value Strategy, Cincinnati, OH: The National Underwriter Company, 2007. InterWest Insurance Services, Inc., Corporate Risk Control Department, Property and Casualty Risk Control Service Levels, Sacramento, CA, 2008. Schwantz, R., The Wedge How to Stop Selling and Start Winning, Cincinnati, OH: The National Underwriter Company, 2006. Related Articles The Total Cost Of Your Insurance Program, Part 1 The Total Cost Of Your Insurance Program, Part 2 The Total Cost Of Your Insurance Program, Part 3 The Total Cost Of Your Insurance Program, Part 4 Authors Dirk Duchsherer collaborated with Jim Newberry (CHST, Bsc Safety Management) in writing this article. Jim is the AVP and Risk Control Manager for Island Insurance Company, LLC in Honolulu, Hawaii.

Dirk Duchscherer

Profile picture for user DirkDuchscherer

Dirk Duchscherer

Dirk Duchscherer confers with CEOs, risk managers, production supervisors and facility directors to identify problems and suggest cost effective solutions. He reviews compliance with such agencies as CALOSHA, NFPA, ANSI, ASTM and DOT and provides clients with technical information on standards, codes and regulations.

The Total Cost of Your Insurance Program, Part 4

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.|

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. Based on the above, for all Property & Casualty requests, please contact your InterWest Risk Control Consultant to determine your customers' needs and services and timelines including the following: Property Protection/Fire Prevention
  • Interpret and prioritize insurance company loss control recommendations.
  • Evaluate sprinkler system installations utilizing NFPA 13, 231, and 231C.
  • Assist clients with automatic sprinkler system and fire hydrant testing.
  • Analyze building valuations and construction class codes.
  • Site inspections and audits including: cooking equipment, spray painting, flammable liquids and chemical storage, indoor/outdoor pallet/tire storage, in-rack arrangement of stock.
  • Course of construction/builder’s risk accounts for fire prevention and security.
Boiler and Machinery Protection
  • Interpret and prioritize insurance company loss control recommendations.
  • Determine state operating permit criteria based on objects such as high/low pressure steam boilers, air tanks, LPG tanks, storage water heaters, etc.
  • Provide on-site consultation of machinery and equipment, unique business interruption exposures, and preventative maintenance and inspection activities and forms.
General and Public Liability
  • Interpret and prioritize insurance company loss control recommendations.
  • Provide on-site assistance for life safety concerns with risks such as educational institutions, restaurants, hotels and motels, shopping centers, office properties, and residential risks.
  • Evaluate public safety such as emergency exits and lighting, walking surfaces, ramps, stairways and steps, lighting, guardrails and handrails, maximum occupancy limits, and similar items.
  • Assist with complying with the Americans with Disabilities Act (ADA).
  • Analyze public injuries and illnesses to determine loss trending and corrective measures for preventing reoccurrences.
  • Attend and participate at supervisory and management-type training sessions to provide information on accident investigations and accident review board committees as well as follow through on any relevant loss prevention remedies arising from these sessions.
  • Evaluate playground equipment for parks and school risks.
Product Safety
  • Interpret and prioritize insurance company loss control recommendations.
  • Coordinate loss control activities between insurance companies and clients for loss prevention services.
  • Review existing quality assurance and control manuals relating to standards such as ANSI, ASME, CPSC, voluntary industry product safety guidelines, etc.
  • Provide on-site plant tour and analysis of manufactured products. Evaluate quality control measures, plant reviews, blueprints, and drawings.
Fleet Safety
  • Interpret and prioritize insurance company loss control recommendations.
  • Provide clients with technical information on DOT and CAL-OSHA regulations.
  • Specifically offer the following services for our clients:
    • Audit fleet safety program including driver selection, vehicle inspection and maintenance, accident investigations, motor vehicle record check criteria, driver logs, etc.
    • Perform on-site surveys of vehicles, inspection and maintenance activities, and premises.
    • Complete vehicle observations and evaluations of straight trucks, cab-overs, private passenger automobiles, and tractor/trailer rigs for backing, lane changing, following distances, and speed of travel.
    • Review driver qualification files with management to determine driver logs, Commercial Driver License, physical examination, written/road test certification, safety incentives and awards, and similar documents.
    • Perform “ride-alongs” with company drivers to evaluate speed of travel, following distances, lane changes, backing, product control and security, and customer interfacing.
    • Attend and participate at fleet safety meetings and accident review board committees on defensive driving topics, vehicle losses, and accidents, and safety incentive awards, etc.
Additional Services
  • Access to defensive driver training, property management, online risk management training on InfoSource Café (InterWest's extranet to provide clients with important resources to be better prepared for dealing with emergencies, to find answers for Cal-OSHA compliance issues, to improve their injury prevention efforts, to manage risks associated with property and products, and to maximize value of employee benefit programs)
  • Access to fleet safety videos including defensive driver (fee may apply)
  • Disaster response plan development and review.
  • Sexual harassment prevention training for managers/supervisors and employees.
  • HR consulting available (may be fee based).
  • Customized inspection/audit forms for buildings, equipment, vehicles and premises.
  • "Tailored" forms for accident investigation and training, including property, liability, and fleet.
  • Liquor Liability awareness training.
  • Assist in determining root causes of losses and accidents with internal and external claims departments.
Workers Compensation Service Level Guidelines ($4,000 - $20,000+ in Revenue) InterWest brokers can also use a Service Time Line Report (including above risk control service levels) once agreed upon between the customer to monitor activities from risk control, claims, accounting, etc. Here is a sample Service Time Line Report. Loss Control Service Level: Level I Total Revenue: $4,000 to 6,500 Description of Service Levels/Sample Services Contact will be informal, Access to all appropriate services via InfoSource Café, phone consultation and workers compensation safety survey/audit. Follow up on a consultative basis and electronic review of current safety plans and newly completed templates for accuracy and detail. They will be invited to participate in regional workshops and safety webinars. Loss Control Service Level: Level II Total Revenue: $6,501 to 12,500 Description of Service Levels/Sample Services One to two visits annually based on need; Contact will be formal and informal, will receive a formal safety/audit and review, receive written recommendations for priority based services, safety one-on-one training for supervisors, specific safety training based on need. Follow up on a consultative basis and electronic review of current safety plans and newly completed templates for accuracy and detail. They will be invited to participate in regional workshops and safety webinars. Loss control to provide recommendations for the written service timeline. Loss Control Service Level: Level III Total Revenue: $12,501 to 20,000 Description of Service Levels/Sample Services Two to four visits annually based on need; Contact will be formal and informal, will receive a formal safety/audit and review, receive written recommendations for priority based services, safety one-on-one training for supervisors, specific safety training based on need. A loss control representative will be available to sit in on claims reviews, follow up on a consultative basis and electronic review of current safety plans and newly completed templates for accuracy and detail. They will be invited to participate in regional workshops and safety webinars. Loss control to provide recommendations for the written service timeline. Loss Control Service Level: Level IV Total Revenue: $20,001 and Up Description of Service Levels/Sample Services Minimum four contacts with the client and service open based on need and structured service plan. Loss control representation will be available to sit in on claims reviews. Related Articles The Total Cost Of Your Insurance Program, Part 1 The Total Cost Of Your Insurance Program, Part 2 The Total Cost Of Your Insurance Program, Part 3 The Total Cost Of Your Insurance Program, Part 5 Authors Dirk Duchsherer collaborated with Jim Newberry (CHST, Bsc Safety Management) in writing this article. Jim is the AVP and Risk Control Manager for Island Insurance Company, LLC in Honolulu, Hawaii.

Dirk Duchscherer

Profile picture for user DirkDuchscherer

Dirk Duchscherer

Dirk Duchscherer confers with CEOs, risk managers, production supervisors and facility directors to identify problems and suggest cost effective solutions. He reviews compliance with such agencies as CALOSHA, NFPA, ANSI, ASTM and DOT and provides clients with technical information on standards, codes and regulations.

The Total Cost of Your Insurance Program, Part 3

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 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. The Triangle of Risk Control Services presented during the American Society of Safety Engineers (ASSE's) Fall 2008 Risk Control Symposium outlined a typical "triangle" which illustrates the relationships between the client/risk manager-broker-carrier. Specifically, the broker risk control consultant's needs/role include:
  • New prospects/accounts
  • Customer retention and satisfaction
  • Long-term and healthy carrier partnerships
  • Assisting existing clients in lowering TCOR
  • Ongoing growth and knowledge to understand clients' exposures and needs
The key to a successful "triangle" for both the client/risk manager and carrier/broker is a long-term risk improvement plan including: regular site visits and assessments, historical loss analysis, understanding client "culture" and ability to change, and committed partnership with carrier and broker risk control staffs. In his book "The Wedge: How to Stop Selling and Start Winning" Author Randy Schwantz says (that to draw in new clients) you need to create a wedge between the incumbent broker and your prospect. Your goal is to get the existing broker fired! In other words, what can you do as the new broker that the incumbent is not doing for you to earn the new business? For a broker's current "book of business," Randy states that you need to protect your top 20 clients. One of your tools needs to include a Service Time Line Report (a "sample" is included later in this article). In 2008, InterWest Insurance Services adopted and implemented the Wedge sales platform for obtaining/retaining its prospects/clients company-wide. One of the key "wedge" components is InterWest's Risk Control Department. To help achieve InterWest's targeted middle market, accounts generating at least $10,000 for Property and Casualty (P & C) and between $4,000-$20,000+ for workers compensation (WC) annually in revenue qualify for risk control service. Related Articles The Total Cost Of Your Insurance Program, Part 1 The Total Cost Of Your Insurance Program, Part 2 The Total Cost Of Your Insurance Program, Part 4 The Total Cost Of Your Insurance Program, Part 5 Authors Dirk Duchsherer collaborated with Jim Newberry (CHST, Bsc Safety Management) in writing this article. Jim is the AVP and Risk Control Manager for Island Insurance Company, LLC in Honolulu, Hawaii.

Dirk Duchscherer

Profile picture for user DirkDuchscherer

Dirk Duchscherer

Dirk Duchscherer confers with CEOs, risk managers, production supervisors and facility directors to identify problems and suggest cost effective solutions. He reviews compliance with such agencies as CALOSHA, NFPA, ANSI, ASTM and DOT and provides clients with technical information on standards, codes and regulations.

The Total Cost Of Your Insurance Program, Part 2

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.|

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
Property Risk Control provides a full range of property conservation and loss prevention services to eliminate or minimize the frequency and extent of property losses. Risk Control can conduct on-site assessments of facilities to evaluate company exposure to loss from fire, windstorm, flood and earthquake and other covered perils. Specialists can also test and evaluate sprinkler systems, special extinguishing systems and water supplies. This can extend to a review of the human element programs that exist to assure they are up to date and functioning properly. Risk Control can analyze business interruption potential to identify potential bottlenecks, critical equipment, and interdependencies that might impact daily operations and revenue streams. When a new facility is added or an upgrade to existing facilities is to take place, Risk Control can develop protection specifications, as well as review building and fire protection plans so that the facility will be adequately arranged and protected upon completion. All of these efforts focus on helping the company maintain operations and avoid costly interruptions that can hurt the bottom line. Other areas of expertise include but are not limited to: Commercial Automobile/Fleet; Ergonomics, Industrial Hygiene, Workers' Compensation, Boiler and Machinery, Inland Marine in addition to industry specialties (e.g. petrochemical, construction, healthcare and chemical, etc.). There are a myriad of services that can be provided in and amongst all the coverages the insurance companies provide. Some insurance companies' risk control operations can be categorized into the type of services they specialize in, while others may try to be all things to everyone. Traditional categories include: training, technical, and industry specialists. This last category includes both carriers that cater to niche markets specializing in particular types of risks (e.g. not for profits, schools, heavy industry, municipalities — to name a few) or could just be large insurance companies that have the resources to help large companies deal with the complexities of, for example, project management and construction management or the risk analytics of projects that are unique or very high risk. This subject would not be complete without mentioning the insurance of special types of projects and high risk operations which involves risk sharing and self insurance. We also might call this “creative risk financing”. Insurance is in fact "risk financing" so the creative element only has the limitations of what an insured or client and an insurance element or vehicle respectively are willing to risk. Risk Control plays a big role in this equation because both large and high risks involve a sizable chunk of change if not managed creatively and, with a good balance of Risk Control, can beat the odds and save a lot of premium. Well-managed risks of this type can yield sizable savings. The final area that will be covered on the subject of carrier risk control is how work is coordinated. To this end, service levels are normally determined by a combination of premium size and hazard of risk/operations relative to coverage. Services are often time-controlled by underwriting since they are the managers of the account, but this authority will sometimes be transferred to a service team, with underwriting involvement. This is an interdisciplinary team made up of claims, audit, underwriting, loss control and they are charged with identifying the customer's service needs and developing an account strategy to meet those needs, ensuring that value is being provided to the customer and to the company. The underwriter or service team is responsible for clearly accounting for the cost of the services provided and assuring the costs to deliver the necessary level of service is included in the premium or taken into consideration in some fashion. Risk control services can be very diverse, varying considerably from company to company and were discussed above in some detail. In addition to the items above, services traditionally include: site surveys; risk assessment & risk analysis audits, specific safety audits, training based on line(s) of coverage, technical training, management/supervisor training; job site visits, legal/jurisdictional inspections of boilers and pressure vessels, safety materials such as pamphlets, brochures, video/reference libraries, web site access, etc.). They can also vary from high touch services which are service intensive to low touch which are economical to deliver. Related Articles The Total Cost Of Your Insurance Program, Part 1 The Total Cost Of Your Insurance Program, Part 3 The Total Cost Of Your Insurance Program, Part 4 The Total Cost Of Your Insurance Program, Part 5 Authors Dirk Duchsherer collaborated with Jim Newberry (CHST, Bsc Safety Management) in writing this article. Jim is the AVP and Risk Control Manager for Island Insurance Company, LLC in Honolulu, Hawaii.

Dirk Duchscherer

Profile picture for user DirkDuchscherer

Dirk Duchscherer

Dirk Duchscherer confers with CEOs, risk managers, production supervisors and facility directors to identify problems and suggest cost effective solutions. He reviews compliance with such agencies as CALOSHA, NFPA, ANSI, ASTM and DOT and provides clients with technical information on standards, codes and regulations.

The Total Cost Of Your Insurance Program, Part 1

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.|

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. Role clarity for the three major functions of an insurance carrier:
  • The Risk Control Role: Develop accurate account information (understand what we are insuring). Plan, organize, and lead LC service delivery to achieve significant account-level loss reduction and customer satisfaction.
  • The Underwriting Role: Solicit, select and manage profitable business.
  • The Claim Role: Provide professional claim handling within the spirit and the letter of the law, in a fashion that treats the policyholder and claimant fairly and does not create legal liability for the company, our insured’s and agencies while achieving increased profitability through effective cost containment strategies and programs as well as enhancing the image and value added capabilities of the company.
Taking this a bit further, let’s clarify the goals for Risk Control — what are we trying to accomplish:
  • Loss Management is a better term than the traditional Loss Control term, probably even better than Risk Control, but it doesn’t have the same level of correspondence to the function. Thus, while Risk Control is winning out regarding the name game, Loss Management is a better describer of the purpose at hand because our primary goal is to reduce; eliminate and or mitigate losses.
  • Providing meaningful services that our customers desire and which achieve good customer retention is also important, and can compete with the primary goal in many ways. In instances where we can seemingly have no real affect on a customer’s loss performance (they are having zero losses), risk control can be a significant ambassador to the insurance client. In this regard, let me point out some very interesting customer service statistics before we proceed further, to make this point clear (the point being, there is more to risk control servicing than loss management).Some customer service statistics:
    1. A typical business hears from only 4% of its dissatisfied customers. The other 96% just go quietly away and 9% will never come back. That represents a serious financial loss for companies whose people don't know how to treat customers, and a tremendous gain to those that do.
    2. A survey on "why customers quit" found the following: 3% move away 5% develop other business relationships 9% leave for competitive reasons 14% are dissatisfied with the product 68% quit because of the perceived attitude of indifference toward the customer by an owner, manager, or employee
    3. A typical dissatisfied customer will tell 8 to 10 people about his problem. One in 5 will tell 20. It takes 12 positive service experiences to make up for one negative incident.
    4. Seven out of 10 complaining customers will do business with you again if you resolve the complaint in their favor. If you resolve it on the spot, 95% will do business with you again. On average, a satisfied customer will tell 5 people about the problem and how it was satisfactorily resolved.
    5. The average business spends 6 times more effort to attract new customers than it does to keep old ones. Yet customer loyalty is, in most cases, worth 10 times the price of a single purchase.
    6. Businesses that have low service quality average only 1% return on sales and lose market share at the rate of 2% per year. Businesses with high service quality average a 15% return on sales, gain market share at the rate of 6% per year, and charge significantly higher prices.
    Remember, when it comes to customer service, it's the customer's perception that really counts, regardless of how well you think you're doing your job.
Related Articles The Total Cost Of Your Insurance Program, Part 2 The Total Cost Of Your Insurance Program, Part 3 The Total Cost Of Your Insurance Program, Part 4 The Total Cost Of Your Insurance Program, Part 5 Authors Dirk Duchsherer collaborated with Jim Newberry (CHST, Bsc Safety Management) in writing this article. Jim is the AVP and Risk Control Manager for Island Insurance Company, LLC in Honolulu, Hawaii.

Dirk Duchscherer

Profile picture for user DirkDuchscherer

Dirk Duchscherer

Dirk Duchscherer confers with CEOs, risk managers, production supervisors and facility directors to identify problems and suggest cost effective solutions. He reviews compliance with such agencies as CALOSHA, NFPA, ANSI, ASTM and DOT and provides clients with technical information on standards, codes and regulations.

Do Natural Disasters Matter To Me As An Insurance Buyer?

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 is Yes.|

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. A carrier might have multiple layers of reinsurance with each policy taking a defined portion of any loss such as 5 million of coverage after the paid loss totals 15 million, and these policies each have a defined portion of a loss for a defined premium. These reinsurance premiums are then included in the premium that each policy holder pays each year. Reinsurance premiums can average as much as 15 to 20% of the annual premium you pay as a business owner. If the reinsurance carriers have to participate in the cost of a catastrophe such as Japan or New Zealand for earthquakes or hurricanes or tornadoes, then the premium they charge will increase which will increase the premiums your carrier pays for the protection and thus your individual premiums can go up. It is this ability to spread high dollar losses to numerous carriers that makes insurance work in any situation. The reinsurance industry is absorbing losses at a record pace over the last six months, but through careful management of assets and surplus has been able to remain solvent and financially able to continue to provide protection. We are starting to see an indication that rates are going to adjust upward to replenish surplus for reinsurance carriers. Increases will be variable based on location, line of business and carrier concentration. The industry is keeping a wary eye on the upcoming hurricane season. If a large event takes place in the United States in a heavily populated area, it could be the final event that generates a rapid increase in pricing at the individual policy level. Stay tuned for further developments.

Chuck Coppage

Profile picture for user ChuckCoppage

Chuck Coppage

Chuck Coppage manages the Alternative Markets Division for <a href="http://www.iwins.com">InterWest Insurance Services</a> where he assists in identifying clients who would benefit from insurance solutions involving risk transfer as part of their overall financial management strategy.

Self-Insured Retention vs. Collateral - What is the True Cost of Risk?

Knowing that virtually every high deductible or self-insured option you choose requires collateral, how do you decide which option is the most cost-effective? It&rsquo;s important that you have a very savvy, experienced, and knowledgeable insurance broker or consultant assisting you in weighing these options. Furthermore, your broker must understand the implications of collateral demands when risk is retained.
|

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 &mdash; which goes up most corporate ladders to the CFO or Treasurer &mdash; 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). For example, when you take a mortgage out on your house, the amount you owe the lender is supposed to be adequately collateralized &mdash; at least since the ’08 housing bubble burst &mdash; by the sales value of your home. In fact, in today’s post-recession real estate market, banks are requiring excellent lender credit ratings as well as a real estate loan that is typically no greater than 80% of the appraised value of your home. After all, your home is the bank’s only secured collateral in the event you default on your mortgage. So, who is taking the risk if your company fails to make its workers compensation claim payments within the self-insured retention &mdash; which is often 90% or more of all corporate claims costs? The fact of the matter is simple. No insurer, captive, or state/governmental agency has any intention of bailing out your company if and when it goes bankrupt, or for whatever reason, fails to meet its workers compensation obligations under the law. In the event of default, therefore, the company’s excess insurance policy must drop down to pick up any unpaid claim costs on a “first dollar” basis. Does this mean the excess insurer is out of pocket for the losses paid within the self-insured retention/high deductible?Simply put, no insurer is willing to take the risk that its insured may be unable or unwilling to pay its high deductible. Similarly, no state government wants to assume to liability of a legally self-insured entity failing to pay its workers compensation obligations. The only sure way to avoid having the excess insurer, captive, or the State assuming the costs arising from a default is to require sufficient collateralization of the policy periods covered by high deductible or self-insurance. In the case of insurers, the terms, timing, and amount of collateral is negotiated and typically requires that the insured put up: a cash deposit; an irrevocable letter-of credit; securities (i.e. certificates of deposit); or a surety bond payable to the insurer in the event of default. For insurers, the collateral target is determined by actuarial estimates, including the estimated ultimate cost (including IBNR and ULAE) of all claims within the entity’s high deductible or SIR retention level. Obviously, the collateral requirement grows in the aggregate with each policy year of workers comp coverage. Now, you understand why the entity’s CFO is concerned. Tying up your company’s collateral or its credit revolver (the amount your bank(s) provides your company as a line-of-credit) is a huge issue. While the cost and amount of this may vary to some degree depending upon your company’s credit rating and banking relationships, the fact of the matter is that this collateral can build up to significant amounts over the years. In California alone, there are dozens of large companies with sizable self-insured retentions with aggregate workers compensation claim risks from $100 to $500 million. The amount of collateral required is almost always determined by an actuary &mdash; usually the insurer’s unless you are a true self-insured entity. Knowing that virtually every high deductible or self-insured option you choose requires collateral, how do you decide which option is the most cost-effective? It’s important that you have a very savvy, experienced, and knowledgeable insurance broker or consultant assisting you in weighing these options. Furthermore, your broker must understand the implications of collateral demands when risk is retained. This is a much more challenging process than simply selecting an SIR based upon excess insurance quotes. So the question arises ... How much collateral do we need to post? What will it cost our entity to tie-up this amount of money each year? To the CFO, this issue may be the driving factor in your workers compensation strategy. Essentially, there are two major factors that determine collateralization: (1) the expected amount of aggregate claim exposure; and (2) the entity’s credit risk rating or factor. In general, the only break you’ll get in posting the actuarially determined deposit is if you’re with an insurer that may consider your company a “good credit risk” and allow you to post your annual collateral (keep in mind that it’s in aggregate) on a delayed basis, such as 3 to 6 months into your new policy year. In my previous experience as a VP of Risk Management for an international company doing business in 38 states, we hired a leading actuarial firm to challenge the quarterly actuarial numbers asserted to us by our excess insurer’s in-house actuary. Usually, we were able to negotiate some minor concessions relating to the collateral posted with the carrier. The amount of collateral was revisited at a minimum of every quarter. Most states allow a self-insured the opportunity to choose its own self-insured retention (up to a certain limit); its excess carrier (if any); and in many states, self-insured’s are allowed to self–administer their workers comp claims &mdash; as opposed to using the excess insurer or a designated Third Party Administrator. In California, the Self-Insurers’ Security Fund (a non-profit entity that guarantees the take-over and payment of private and group self-insured entities in the event of default) pioneered an option in 2003 that no other state, except North Carolina, has been able to offer. Individual self-insured entities with equivalent credit ratings of AAA (A+) to B3 (B-) are eligible for the Alternative Security Program (ASP). Under this arrangement, qualified self-insured’s have their “deposit” (State-required collateral) covered by the Security Fund. In short, the self-insureds pay an assessment that mimics their cost of securing a Letter of Credit (LOC) from a bank. The Security Fund uses a sliding scale with 16 intervals, AAA to B3, to determine the factor (multiplier) used to determine its annual assessment. Included in the assessment calculations are the Security Fund’s operating expenses, hedging costs, as well as any funds targeted to build the Security Fund’s reserves. In 2010-11, this factor ranged from 16 basis points (AAA) to 355 basis points (B3). The distinct advantage to this unique ASP program option is that nearly 350 California individual self-insured entities are able to free-up large sums of monies or a Letter of Credit. The Security Fund annual assessment is a fee, and the company’s credit revolver is not impacted since there is no secured debt arrangement. This frees up nearly $5.9 billion of workers’ comp collateral each year, and it allows these self-insured companies &mdash; including non-profit and religious organizations &mdash; to use their creditworthiness to pursue business and organizational goals.

Jeff Pettegrew

Profile picture for user JeffPettegrew

Jeff Pettegrew

As a renown workers’ compensation expert and industry thought leader for 40 years, Jeff Pettegrew seeks to promote and improve understanding of the advantages of the unique Texas alternative injury benefit plan through active engagement with industry and news media as well as social media.

The Big Mystery - Who's In and Who's Out of Obamacare?

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. |

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.This type of thinking is unheard of in the recent past, but is becoming more common in today’s marketplace.  What had once become a recruiting tool to attract employees has now become a financial burden jeopardizing the company’s profits.  Who is thinking this way?  Is it the small employer or the large employer? Is it the regional or the multi-national?  What was initially presented as a solution to solving the woes of our healthcare system (i.e., PPACA), is now becoming a turning point or a decision point where radical changes are being considered.

Who will remain?  Who can afford to remain?  Has this been a disguised attempt at creating a nationalized system?  No one seems to know these answers, but clearly this has become time of significant decision making.  The combination of a painful recession, deepening federal and state deficits, continuing increased health care costs, and a general dissatisfaction on several fronts have all led to serious and thoughtful discussion to re-look at how businesses spend their scarce and treasured monies.  This is an interesting time facing all of us.  Stay tuned for more discussion on this topic.

David Axene

Profile picture for user DavidAxene

David Axene

David Axene started Axene Health Partners in 2003 after a successful career at Ernst & Young and Milliman & Robertson. He is an internationally recognized health consultant and is recognized as a strategist and thought leader in the insurance industry.

California AB52 – Is This A Good Bill Or A Bad Bill?

If and when California AB52 is finally put into law, it is critical that this new empowerment of regulators includes appropriate actuarial review of what is going on, not just the arbitrary judgment of regulators and public opinion polls.|

In the State of California, current law requires carriers and health care service contractors to notify when rate changes are about to happen. In the case of health insurance regulated by the Department of Insurance (i.e., DOI), there is a prohibition of any rate that results in a life-time loss ratio below 70%. New Federal law prohibits annual loss ratios below 80%. However, there is no current authority given to regulators to approve or reject rates. AB52 changes that by granting regulators the authority to reject and rate or rate change that is found to be excessive, inadequate, or unfairly discriminatory. The bill also requires specific information to be submitted for review by regulators. The bill would authorize the imposition of fees on health care service plans and health insurers for purposes of implementation, for deposit into newly created funds, subject to appropriation. The bill would impose civil penalties on a health care service plan or health insurer, and subject a health care service plan to discipline, for a violation of these provisions, as specified. The bill would establish proceedings for the review of any action taken under those provisions related to rate applications. AB52 clearly authorizes regulators to be more aggressive in their review of rates and rate increases. Current regulation seems to unnecessarily restrict what regulators can do. To the extent that health plans and carriers propose rates and rate increases that are unreasonable, this provides valuable enabling regulation. On the other hand if rates and rate increases are reasonable, AB52 provides a more aggressive and more visible forum for argument and discussion. The rate development process is complex and one that is not readily or thoroughly understood by the non-actuary. Although actuarial calculations are objective, many of the calculations are based upon actuarial assumptions which can be subjective. One person’s objective and reasonable assumption might be determined as unreasonable by someone else. Specifically the setting of underlying health care inflation, a key determinant of rate increases, is subject to major controversy. If the regulators inappropriately charge the carrier as being unreasonable in setting of their assumptions, AB52 introduces a new empowerment that could prove to be more damaging than helpful. Public opinion polls opposing large rate increases have nothing to do with the reality that large rate increases may be appropriate. No one will argue that they are higher than what might be wanted or hoped for. If the appropriately applied actuarial science shows that the rate levels and rate increases are reasonable, then the regulators need to accept the outcome. The underlying characteristics of the health care system may be to blame, not the carriers. If and when AB52 is finally put into law, it is critical that this new empowerment of regulators includes appropriate actuarial review of what is going on, not just the arbitrary judgment of regulators and public opinion polls.

David Axene

Profile picture for user DavidAxene

David Axene

David Axene started Axene Health Partners in 2003 after a successful career at Ernst & Young and Milliman & Robertson. He is an internationally recognized health consultant and is recognized as a strategist and thought leader in the insurance industry.

Directors' & Officers' Liability

Directors' & Officers' (D&O) liability has become an increasingly core coverage for many companies, regardless of size, type, non-profit/for-profit status, and rightfully so. Considering our litigious society, and today's difficult economic environment, D&O coverage should be an essential part of your insurance program.|

Directors' & Officers' Liability Coverage — The Basics Directors' & Officers' (D&O) liability has become an increasingly core coverage for many companies, regardless of size, type, non-profit/for-profit status, and rightfully so. Considering our litigious society, and today's difficult economic environment, D&O coverage should be an essential part of your insurance program. Typical D&O coverage provides for "any actual or alleged act or omission, error, misstatement, misleading statement, neglect or breach of duty by an Insured Person in the discharge of his/her duties." In basic terms, D&O policies are designed to provide financial protection for your directors and officers while performing their duties as relates to their company. Directors' & Officers' Liability — The Risks Common activities and situations in which D&O coverage would come into play:
  • Conflicts of Interest — many executives serve on multiple boards and/or have investment portfolios that could potentially create conflict of interest situations. Non-profit board members, in particular, are more likely to be affiliated with a number of organizations within their communities, both professionally and personally, placing them at additional risk. Be certain your company adopts and enforces formal Conflict of Interest policies that all members must adhere to.
  • Information Disclosure — the SEC has specific requirements that all publicly traded firms must follow as to when and how information is released and broadcast to the public. In addition, your employees and other directors and officers have certain expectations regarding confidentiality. Breach of these regulations, rules or expectations may open your company up to both civil and criminal suits and judgments. Ensure your company has strict, written protocols regarding the dissemination of information, both privately and publicly.
  • Breach of Duty of Loyalty and Breach of Duty of Care — Your directors and officers can be held personally responsible for negligent investment decisions and/or alleged failure to operate in honesty and good faith, whether these actions be direct or indirect. Employees and shareholders alike expect a company's portfolio to perform well and a lackluster performance can oftentimes be traced back to the lack of corporate governance and poor management. Your firm's officers must create and adhere to strict written fiduciary care guidelines so as to avoid shareholder derivative actions.
Directors' & Officers' Liability — The Protection D&O policies vary greatly from insurer to insurer and are oftentimes designed for particular types of risks. The most common types of policies are those designed for non-profit and for-profit organizations and publicly traded and privately held companies. Some important components to consider when purchasing coverage are:
  • Entity Coverage — Provides direct protection for the firm itself. Many suits name individuals as well as the organization and Entity coverage ensures coverage for liability incurred by the organization.
  • Duty to Defend Provision — Requires the insurer to pay claim expenses even if the allegations are baseless, rather than providing reimbursement after such a claim is closed.
  • Defense Costs Insured Outside the Limit of Liability — An essential provision! Many plaintiffs seek to protect their own long-term interests and investments in a company by seeking to impose new corporate management practices rather than monetary damages. In addition, a class action suit can easily and quickly exhaust a policy's limit of liability with pure defense costs.
  • Outside Entity Coverage — Extends coverage to individuals serving on other boards as part of their job function.
  • Broadened Definition of An Insured — Expands coverage to include your employees, volunteers, trustees, committee members, family members and spouses.
  • Libel, Slander, Copyright and Trademark Infringements — Extends personal injury coverage for suits alleging damages related to publishing liability.
  • Severability Clause — Assures protection for innocent parties within the application process. The provision provides for knowledge of material or false statements given within the application as possessed by one insured will not be imputed to another insured.

Add a Comment or Ask a Question

blog comments powered by Disqus

Cynthia Byers

Profile picture for user CynthiaByers

Cynthia Byers

Cynthia is an Account Executive with <a href="http://www.iwins.com">InterWest Insurance Services</a> and has over 13 years of formal insurance experience in managing hospitality and golf and country club risks.She is also a Certified Insurance Service Representative and is nearing the award of the coveted Certified Insurance Counselor designation.