Strategies for Controlling your Cost of Risk 1
controlling cost of risk is a learning process 2
which direction will you go to control your cost of risk 3
understanding your industry is crucial to creating an appropriate strategy for controlling your cost of risk 4
risk management The practice of identifying and analyzing loss exposures and taking steps to minimize the financial impact of the risks they impose. 5
The RISK MANAGEMENT OVERVIEW The Five Step of the risk management process 6
Five steps of the risk management process Risk Identification Risk Analysis Quantitative Qualitative Risk Control Risk Finance Risk Administration / Monitoring 7
risk identification The process of identifying the hazards and perils that expose individuals and families to loss. We can t manage what we don t IDENTIFY Done work. correctly this is can be hard 8
risk identification logical classifications for identifying risk Property Human Resources Identification Methods Checklists/surveys Flowcharts Insurance policy analysis Physical Inspections Net Income/Financial analysis 9
risk analysis Qualitative Analysis (What?) Risk Assessment Financial Assessment Loss Data Assessment Quantitate Analysis ( How Much?) Quantify Exposures 10
risk control The technique of minimizing the frequency or severity of losses with training, safety, and security measures. 11
risk control PRE-LOSS Avoidance Prevention Reduction Segregation Physical Transfer Combination POST-LOSS Claims Management 12
risk financing Risk financing programs can involve insurance rating plans, such as retrospective rating, self-insurance programs, or captive insurers, or large deductible programs. 13
risk financing RETENTION Passive Active TRANSFER Insurance 14
risk administration " Planning and Policy Development Implementation Monitoring (including RMIS) 15
cost of risk defined 16
Cost of risk- All components that are allocated to cover losses and expenses Usually includes: insurance premiums; retained losses; risk management department costs; fees for consultants; Can also include indirect costs such as; such as loss of productivity; cost of overtime and opportunity costs. 17
insurance policy premium 18
exposure base The basis to which rates are applied to determine premium. Exposures may be measured by: payroll as in worker s compensation or commercial general liability. receipts, sales, square footage, area manhours for (general liability), or per unit as in (automobile). depending on the cover the rates are per $100 or per $1,000 times the rate. 19
exposure base by operation For service companies = Payroll For manufacturing companies = Sales For premises = Area For truckers = Total Miles Oil Lease Operators = Number of Wells per depth category 20
the rating process 21
Loss Costs versus Rates 22
Prior to the mid-1990s, insurance advisory organizations published rates for insurance coverage. Now, in most states and for most types of insurance, these organizations publish loss costs. The difference is that prospective loss costs contemplate only expected losses and loss adjustment expenses, whereas rates included loadings for catastrophic losses, insurer expenses, and underwriting profit, as well. 23
At one time, insurance rates were heavily regulated. Rating organizations would compile industry-wide loss and exposure information for each classification for the various lines of coverage, estimate losses for each classification, add an allowance for insurer expenses and profits, seek approval from regulators, and issue rates that all insurers were required to use in a particular state. This regulated rating process was particularly applicable to workers compensation rating, where it was known as "administered pricing." In today s rating environment, workers compensation insurance is the last bastion of regulated rating, with assigned risk policies subject to regulated rates and a handful of states still using administered pricing. However, even in workers compensation, "competitive rating," whereby insurers are allowed a great deal of flexibility to determine their own rates, is much more common. 24
Strategies of Controlling the Cost of Risk 25
California Ex Mods In California the Worker s Compensation Rating Bureau (WCIRB) collects the payroll and loss data from every insurer six months after the insured s policy expiration date. The new experience modifier is promulgated six months after the policy expiration date. 26
Experience Modifier Experience rating is a method of modifying employers' workers compensation premiums based on their own loss history. An experience modifier is an employer-specific multiplier that measures its loss experience relative to that of other employers in the same industry. The experience modifier is applied to the unmodified premium to adjust for prior loss experience. 27
What are the other factors in determining final premium. Underwriters will review risk control reports to determine the insured s ability to control loss. If they are comfortable that the losses represented were unusual they will overcome the debit mod with: Premium discount factors Schedule credits 28
claims experience!!!!! Your claims experience will ultimately determine your cost of risk or worker s compensation premium. We request claims review meetings the week after policy expiration. This allows the insurer claims team to coordinate reports 29
Why did they decline to quote? 30
declined due to appetite... what? This is a typical statement we receive when an underwriter can t or won t write a risk because of all or part of an insured s operation. Don t fall in love with operations that increase your cost of risk unnecessarily. When underwriter s don t want write your insurance because of certain parts of your operation, consider avoiding the risk altogether by hiring a subcontractor to perform the work, e.g. crane & rigging operations. By avoiding crane & rigging altogether more insurers will be interested in writing your insurance. Negotiating lower premiums are more likely. 31
contractual risk transfer Contractual risk transfer (sometimes called noninsurance risk transfer) involves passing your organization's risks to others by use of hold harmless or indemnity clauses and insurance requirements in business contracts, such as leases. 32
property insurance Consider Higher Deductibles Obtain Coinsurance Credits Invest in Fire Loss Prevention Consider Underwriters Laboratory-Approved UL-90 Roofing Investigate Other Rate Credits and Surcharges Use the Business Interruption Reporting Form Report Proper Builders Risk Values 33
automobile insurance Determine Proper Classifications for Vehicle Use Determine Proper Classifications for Vehicle Location Determine Proper Classifications for Vehicle Use Radius Determine Proper Classifications for Vehicle Weight Avoid Premiums on Mobile Equipment e.g. Cranes, dump trucks, vehicle for maintenance and use of your premises. 34
automobile insurance Use Contractors Equipment Floater Policies Obtain Personal Vehicle Rating Credits Reduce Recreational Vehicle Premiums Consider Specified Causes of Loss Coverage 35
automobile insurance Use Deductibles Self-Insure Collision Self-Insure Bodily Injury and Property Damage Liability Obtain Schedule Credits, Dividends, and Deviations Use Experience Rating Use the Suspension of Insurance Endorsement 36
automobile insurance Understand the "Stated Amount" Approach Discontinue Medical Payments and Personal Injury Protection Coverage Where Possible Discontinue Uninsured/Underinsured Motorists Coverage Where Possible Think Twice about Rental Car Physical Damage Loss Waivers Reject Accident and Health Coverages on Rental Cars 37
commercial general liability insurance Use Proper Classifications Use Lessor s Risk Only Classification Delete Non-applicable Exposures Apply the Executive Officer Payroll Limitation Look Twice at Inter-company Sales Obtain Schedule Credit/ Dividends 38
commercial general liability insurance Use Deductibles Negotiate Premium Credits for Coverage Limitations Use Experience Rating Drop Medical Payments Coverage Obtain Insurance Certificates from Contractors 39
we don t have an appetite for your operations 40
umbrella or excess liability insurance Consider Alternative Primary Limits and Obtain Quotes for Buffer Layers Obtain Competitive Pricing Submit Well-Prepared Specifications Determine the Premium Basis Select Reasonable Umbrella Limits Provide for Automatic Extensions Use Care with Adjustable Rate Policies 41
worker s compensation & employer s liability Obtain Correct Classifications Verify Executive Officer Payroll Limitation Use a "First-Aid" Folder Consider a Deductible Plan Take Advantage of Dividends and Flexible Rates 42
payroll limitations California Rule 41,600 yr. minimum payroll 106,600 yr. maximum payroll Can partners be covered for WC - YES Can sole proprietors be covered for WC YES 43
worker s compensation & employer s liability Review Reserves Prepare a Test Modifier Review Final Modifier Correct Calculation Errors Recognize the Effect of Ownership Changes on Experience Modifiers 44
Insurance Industry Relationships Choose a Knowledgeable Agent or Broker Use a Limited Number of Agencies/ Brokerages Use a Written Scope of Engagement Maintain Communication Know Your Underwriter Use Consultants 45
claims Request Advance Payment of Property Claims Retain Public Adjusters for Large Property Losses Have Periodic Meetings with Insurance Company Adjusters Obtain the Right To Approve Workers Compensation and Liability Claims Payments 46
claims Audit Claims Departments and Adjusting Firms Maintain Loss Records Manage Litigation Costs Aggressively 47
risk control Obtain Senior Management Support for Risk Control Allocate Costs on a Loss-Sensitive Basis Involve Workers in the Safety and Risk Control Process Motivate Safe Work Habits with Incentives Use Pre-hire Measures To Control Claims 48
risk control Communicate with Workers before Injuries Investigate "Near-Miss" Incidents Commission an Independent Safety Program Audit Use Medical Bill Reviewers Use Managed Care Arrangements Implement Visitation and Return-to-Work Programs 49
risk financing Carefully Select Retrospective Minimum and Maximum Factors Negotiate the Agent s Commission Outside the Rating Plan Negotiate Other Retrospective Rating Factors Explore a "Paid Loss" Retrospective Rating Plan 50
risk financing Consider Other Cash Flow Programs Examine the SelfInsurance/Captive Option Consider Alternative Risk Financing Facilities 51
searching for solutions Always remember that organizations don t serve you, their people do. Meeting the team that will serve you is important. 52
saving through competitive bidding Don t Bid Too Frequently Never bid with multiple brokers. Interview brokers. Choose one and let them to their job. Allow Adequate Time To Secure Proposals Provide Adequate Information Don t Bid "Excess and Surplus Lines" Coverages Among Agents 53
other cost savings ideas Consolidate Effective Dates Maximize Purchasing Power with One Insurer Buy Package Policies Consider Multiyear, Non-cancelable Policies Prepare or Verify Premium Audits 54
other cost savings ideas Defer Premiums Develop a Comprehensive Insurance Database Prepare Early for Renewals Hire a Risk Manager Implement Contractual Risk Transfer Programs 55
risk financing choices Guaranteed cost - regardless of how much is spent on paying claims your premium will not exceed the final audit premium. Most expensive, but guaranteed. If cash is too tight this is the best choice. Self-Insured - the company must have $500,000 in net worth and $5,000,000 in annual sales for five years. Reinsurance makes this difficult for smaller organizations. 56
risk financing choices Large Deductible Programs - my personal favorite. As close as you can get to self insurance without exposing you own balance sheet. Insurers will give you more say so in claims. Retrospectively Rated Programs - Buyer beware. Paid loss retro or Incurred loss retro. If paid loss does in convert at any point to Incurred loss. 57
captive insurance Captive insurance should only be considered if: Coverage needed cannot be obtained in the standard market. Policy limits are not available to properly protect your assets. 58
captive insurance The best captive programs: Require insured s to retain at least $100,000 of each claim. Have penalties for members with out of control claims 59
the questions to ask in this priority Is the insurance company financially sound? How does the policy form compare to the others? Premium Cost. 60
Stray Away from Reductions 61
reducing coverage or policy limits Create a procedure in your risk management manual with step by step instructions for reducing coverage of policy limits. Require two signatures, to approve declining coverage or higher policy limits. 62
cost of risk allocation Include all the costs included in your cost of risk It s not a science it s an art. There is not a set formula, therefore you can allocate insurance costs anyway you choose. Some firms use of man hours. Some use mileage, trucking firms. Some use sales. 63
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THE END ISU BUSBY-STONE RISK MANAGEMENT Gregory C. Stone - CIC, MLIS, CRIS busbystone.com 9201 Camino Media suite 250 Bakersfield, CA 93390 661-412-9127 65