approach to risk management

Break The Bottlenecks With Business Insurance

The Harvard Business Review recently published an article titled “Break Your Industry’s Bottlenecks”. The concept being that to create a successful business “you have to break the rules and overturn the received wisdom about how things work.”

This could not be truer when it comes to the purchase of business insurance, which is a bottleneck for businesses and has been done the same old way since the Stone Age.

Two important items stood out:

When business as usual is set aside it significantly reduces cost, and

Outdated purchase is one of the five types of bottlenecks mentioned in the article

Premier Risk Management has also found these two items to be true. Too often the executive responsible for insurance has many responsibilities and business as usual is easy. Resource constraints force executives to stay the course, in turn abandoning meaningful savings opportunities. Companies often assume their broker is the only resource necessary. The executive has done it this way since he/she started in business, did it this way in their old company and this way in their new company. We can’t forget… they have been with the same broker for over 10 years.

Challenge the Business Insurance Status Quo

When companies and executives challenge conventional methods they will benefit and discover what they didn’t know … competition is a healthy alternative! Outsourced Risk Management helps remove the frustration and is an innovative way to provide expertise not otherwise available.

Who, What, When, Where – Does Your Risk Management Program Dig In?

We recommend using the 4W’s as a method of digging in to better understand the operations of a business. This concept is not new and sounds simple but is often not utilized appropriately.

The 4W’s concept can be used as the building blocks with a focus at all stages of operations when considering risk management. Here’s the problem; while every department head is very knowledgeable about their individual expertise it can be difficult if not overwhelming to think about it from the wide-ranging standpoint of risk.

“Digging In” – By using these four basic questions you can gather a wealth of knowledge about your business; the trick is to do this at the various stages of operation and not just the top-level thus coordination is important.

This valuable approach is overlooked and many times in Premier’s early analysis we find that businesses are generalized by the insurance industry and brokers. There is a lack of special attention to the individual company beyond “what is your business”.

This generalization becomes the cracks in the foundation … by doing these analyses you can better understand what risk you are accepting, how to transfer the risk, and/or mitigate the risk. While accepting risk is easy, when it comes to transferring risk most companies are unsure, and mitigating risk falls through the cracks because companies don’t know how to ask the right questions or utilize the services available.

After Premier “Digs In” we helps you better understand what risk to accept or transfer, ultimately we focus on mitigating risk. Imagine speaking to the insurance industry no longer being generalized but having a wealth of understanding. Not only will you be better prepared internally but since you are appropriately addressing risk this practice will result in lower premiums and lower total cost of risk. It’s a Win – Win.

Cost of Risk & The Price of Your Risk Management Program

Every facet of your organization affects your cost of risk. It is difficult, at best, to quantify all aspects of this total cost of risk. For example, if you manufacture specialty equipment or products and you are faced with a recall, what is your loss of reputation or market share? In contrast, other components of your total cost of risk are easily quantifiable, such as insurance premiums, or the downtime of a custom piece of machinery and the resulting lost production.

Total cost of risk is an insurance term describing the cost of both pure and speculative risk. Additionally, cost of risk is synonymous with price — the price of your risk management program. By taking a total cost of risk approach you can positively affect your price.

The goal then is to structure a risk management program that protects the four main asset categories of your business:

Organization
Personnel
Property
Net income

The structure of your risk management program looks to the endgame of your price. To reach the endgame you seek, you must first further define Risk Management into four key tenets:

Identification of exposures through analysis
Implementation of control measures to those exposures
Risk transfer or financing
Management of current and future exposures

Identification of Exposures – Things to Think About

Exposures are both qualitative and quantitative. Analyses into both arenas offer the starting foundation of understanding your current exposures to develop forward-thinking approaches. The qualitative discussion will confirm if the business initiatives are in correlation to the risk management program.

As a CFO, you should look to confirm that your risk management approach supports your overall business objectives. What risks or concerns do you have relative to your business i.e. what type of event would shut you down? If that concern happened, how would your income or cash flow be affected if there were unforeseen depletions of capital or a shutdown in the plant?

A discussion on the qualitative aspects of your business provides the important details needed to solidify the most appropriate game plan to your endgame, price.

What is your viewpoint on risk? Are you/your company risk averse? Is your company in a financial position to take on more risk versus transferring that risk to another party or contractually to a carrier?

To help determine your risk aversion, it helps to assess your company history. For example, if you are a start-up company, cash flow and funds are typically tight, so you are more likely to be adverse to risk to protect the financial viability of your start-up organization.

Conversely, if your company has a 20+ year history, there are also risks, including becoming obsolete, stagnant, or too conservative with your business plan.

Furthermore, consider your industry, market position, and competition in positioning your risk management solution to the changing needs and direction of your business.

Quantitative analysis supports the qualitative interview. Look at the “hard numbers” and prior losses to identify trends in your performance. Also analyze losses to identify a variety of variables, such as:

average incurred costs per loss
total incurred trends
top loss drivers
locations with high frequency issues
fraud behaviors
reporting lag time
frequency vs. severity ratios
OSHA recordable performance

The results of this type of analysis will reveal opportunities to approach the critical areas driving your total cost of risk, price. This evaluation will help to isolate the root causes of these problematic areas and look to implement control measures to mitigate this exposure.

Implementation of Control Measures

Now that you have identified exposures you can focus the appropriate resources to areas that will deliver the highest impact on your bottom line. Control measures should be designed from a pre-loss perspective.

An estimated 75 percent of commercial insurance expenses are claims driven. Look to control and reduce this percentage through pre- and post-loss control measures.

A comprehensive loss control evaluation points to strengths and weaknesses in loss control programs. One may have strong management leadership behind his or her initiatives but have no employee buy-in or participation. Create a risk reduction culture, establish a safety committee, delivering a comprehensive employee safety education campaign. Your business operations will determine the types of measures and approaches to take in addressing your exposures.

There are many post-loss or cost containment strategies. A proactive and effective Return to Work program is one strategy that positively affects your bottom line: offering a bank of modified duty jobs for employees and informing the doctor there is modified work available.

Also, establish a relationship with a local occupational medicine clinic. Interview them to learn about their services and tour their facilities. Invite the physicians into your business to get a first-hand look and understanding of your operations. By providing them with the details of your operations, they can accurately evaluate reported injuries to confirm if they are work related.

Fraudulent claim behavior can drive the cost of risk out of control. The National Insurance Crime Bureau often approaches insurance fraud rings between doctors, physicians and people. Whether it’s an auto accident or alleged workplace accident, send a clear message that fraud will not be tolerated.

Anti-fraud tactics include educating employees on the effects of insurance fraud through payroll stuffers and worksite posters, and offering safety incentives for solid performance. Also, keeping a motor vehicle accident kit in each one of your company vehicles, along with a disposable camera, allows you to document evidence, providing a stronger subrogation results.

An active Loss Control Program and post-loss procedures are key to cost containment.

Risk Transfer/Financing

Once you have identified exposures and created control measures, you can focus on the remaining exposures to transfer and/or finance. You will want to address questions such as: How much risk can you afford to assume in-house? How can we assist in contractually transferring that risk to a third party? Lastly, what portion of the exposures do we want to finance through an insurance policy?

Addressing these questions offers a direction as to how to approach the financing of your risk. Think about current cash flow needs. Are account receivables current? If there is a lag, how long is it, and are there resources to correct it?

Considerations involve self-insured retentions if you have a mature loss control program and the financial reserves to cover those shock losses that occur. Therefore, a combination of insurance and non-insurance strategies should be considered.

Manage Your Exposures

It is estimated that 25 percent of businesses that sustain a major catastrophe are no longer in business within a year’s time. If there is an interruption in your operations, are you prepared?

In a dynamic business environment, risks and exposure change constantly. Therefore, continual monitoring of the programs in place is essential, as well as future business expansions, will help to dictate the course of your risk management program.

We highly recommend you:

Develop a Strategic Action Plan to put the needed control measures in place, including a Disaster Recovery Plan. This involves backing up your policies and procedures.

Offer consistent loss control policies and procedures to all divisions and departments within your organization.

Cost of Risk Resources

To develop the most appropriate risk management program for your organization, you should look to approach ‘insurance’ through a variety of insurance and non-insurance strategies, such as:

Identification processes (qualitative and quantitative)
Loss analysis tools to uncover exposures
Implementation of pre- or post-loss initiatives that address cost containment
Business continuation planning/disaster recovery
Risk financing options, retained losses or transferred
Regulatory compliance issues

As you can see, risk management and protecting your organization is not about just buying an insurance policy. It is about developing a strategic action plan, execute on that plan, and fully commit to the monitoring and support of those initiatives.

“Total cost of risk is an insurance term describing the cost of both pure and speculative risk. Additionally, cost of risk is synonymous with price — the price of your risk management program. We at Premier Risk Management take a total cost of risk approach to positively affect your price.” We dig deep to advocate for you.

This Cost of Risk, Price Control Risk Insights is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.

Risk Tip: 2 important tenets of risk management

Don’t risk more than you can afford to lose…& don’t risk a lot for a little.

Comment: These two are both basics – the first refers to the idea that if you don’t have enough money to pay for the exposure to loss (risk) out of your pocket/balance sheet, then insure for the risk, transfer the risk or avoid the risk. This becomes the client’s comfort level with the risk at hand. Some companies are very comfortable with risk – they plan for it and manage it. Some companies are very uncomfortable with risk and want to chance nothing.

The second has to do with the fact that a business organization can protect vast fortunes and assets for a relatively small amount of money, comparatively speaking. That would be the prudent move for any business owner.

Bottom line: Everyday and in just about everything we do we are faced with risk. Sometimes we choose to take the risk – sometimes we are a little more conservative. No matter how big or how small the business, we all must make choices relative to appropriate risk tolerance for that business. Therefore we must know what those risks are and what the choices and alternatives are to better protect the business organization.

Decisions, Decisions, Decisions…are you capable of making them?

In a recent Harvard Business Review post by Nick Tasler 3 Myths That Kill Strategic Planning, he shares that the most “precious ability” a great leader has is his or her ability to make decisions based on strategic thinking. He uses a Napoleon quote to make his point:

“Nothing is more difficult, and therefore more precious, than to be able to decide.”

It may seem like common sense but decisions go hand in hand with knowledge and as the old saying goes “knowledge is power”. However, leaders should ask themselves – “Do I feel comfortable enough to solely make decisions?”

The goal of get things done well, deciding where to focus, and ultimately having an actionable decision could also be the chapters seen in a risk management 101 course. The reality is, senior management typically wear multiple hats and suffer from resource constraints when it comes to risk management. So the question again is – “do you feel comfortable with the go-at-it alone approach?” As Nick stated in his blog “strategic thinking is about deciding on which opportunities to focus your time, people, and money.”

Fortune 500 companies utilize the knowledge of an in-house risk manager to assist with strategic thinking and in the past many middle market firms assumed an adviser was unnecessary given the presence of a broker. While a broker offers a certain level of knowledge, an outsourced adviser’s knowledge does not come with the sale of a product and the broker relationship is maintained like it does with Fortune 500 firms. Times have changed and in the absence of a full-time in-house risk manager, many middle markets firms have realized the need of an outsourced adviser. It is becoming an industry standard and the companies are realizing both the short and long-term benefits.

While Nick clarified the 3 myths that kill strategic planning; the shortage of knowledge can also be a killer.

Approaches to Risk Management: Part 2 Digging Deeper

In part one of this series, Approaches to Risk Management: The Basic Concepts, we recommended you analyze your business risk management program from 7 major aspects. Beyond these basic concepts, some academic authorities suggest the following as necessary considerations in the development of a formal Risk Management Process as well.

Assets & Exposures – it all starts here. What exactly are your company’s risks and exposures? Look at everything and think outside of the box.

Measure the Risks – qualitative and quantitative analysis for severity – probably loss and estimated maximum financial loss from each occurrence and for frequency – probability of loss occurring. Be in a position to identify problem areas…this is only possible if you have devised a way to analyze your loss information.

Control the Risks – both before loss and after loss. Be in position to limit or mitigate exposures via loss control methods before the loss occurs…that way anything that falls through the cracks can be addressed as part of the post loss evaluation to limit repeat occurrences.

Finance the Risks – how are losses to be paid for? Transfer it to an insurance company or to your balance sheet? Think about it.

Risk Administration and Communication – this involves the implementation and monitoring of the risk management program. Who is going to be assigned to oversee this?

There are many sub-components to each of the categories, which can be considered after these fundamental issues have been evaluated. This subject matter is complex. There are many “moving parts”. Below are a few select areas that certainly rank high for additional review and deeper digging.

Operational Risks – Manufacturing, sales, labor, supply lines, distribution lines, shipping, storage, inventory, advertising, internet and web site usage and disposal of waste to name a few.
Exposure to Business Income Interruption – It is all about the potential for the flow of income being interrupted. Every business has its own unique exposure based on the way they individually conduct business. The question becomes, how can those operations become interrupted? Important point – it’s not just your business but it is those businesses that you rely on to sell to or to receive goods from in order for you to continue your business process.
Physical Risks – these are the risks you face when you own, lease or rent property. What are the exposures that are faced under each scenario?
Financial Risk – Here you are considering such things as cash flow, financial markets, credit risk, lending, liquidity and being over-leveraged or under-leveraged. These issues all play a part in determining how a proper risk management program should be set up.

The important point to illustrate here is that there is a process to be followed and to give you something to think about. As you can see, there is more to it than getting renewal policies and putting them up on a shelf. What was discussed in this and the previous blog is referred to as the traditional “silo” approach to risk management. In our next blog, we will look at another approach to risk management…Enterprise Risk Management (RM).