Most CEOs purchase insurance coverage believing that it will protect their
business from risk. The reality is that buying insurance merely transfers the
potential for economic loss to an insurance
carrier. To truly reduce the possibility of
financial loss, the core culture must include
an effective risk management program.
Over the past 60 years, risk management
has become a sophisticated discipline.
Today’s best-in-class risk management programs help keep workers safe and on the
job, and define accountabilities for results
and ways to measure them.
“The total cost of risk (TCOR) includes,
but is not limited to, insurance premiums,
retained losses, the indirect cost of losses,
outside services and risk management
administration costs,” says William A. (Bill)
Werber, a Certified Risk Manager (CRM)
with Westland Insurance Brokers. “The indirect costs of a loss, such as training time,
overtime, lost productivity, opportunity
costs, lost customers and management
time dealing with claims, increase the
direct loss by two to five times, and that
directly impacts after-tax profit. Truly controlling the cost means stopping the losses
from occurring and aggressively managing
those losses that do occur.”
Smart Business spoke with Werber about how CEOs can design and implement
an effective risk management program.
What defines the risk management process?
Risk management is the practice of protecting an organization from financial damage by identifying, analyzing and controlling risk at the lowest possible long-term
cost. The phases of the risk management
process contemplate the identification of
risk, then analyze and quantify the exposures based on the potential for economic
loss. Then select effective risk management
techniques for controlling and financing the
risks, implement the selected techniques
and continuously monitor the results.
The process itself has value because it
causes managers to be focused on the continuing dynamic process. Insurance premiums will go up and down as part of the
cyclical nature of the insurance business, which is naturally tied to the stock market.
Workers’ compensation costs are directly
tied to your experience, so regardless of
what happens with rates, you can exercise
greater control over your costs by reducing
your losses and subsequently your experience modification factor.
What constitutes an effective risk management program?
Many components individually may produce some results, but the synergistic combination of the important elements of a
best-in-class risk management program
will produce dramatic results.
- Establish a corporate culture that highlights safety accountability as a core value
and a way of doing business. It is unacceptable to get hurt on the job or crash a
company vehicle. - Initiate a well-defined process around
incident and injury reporting that places
clear accountabilities for managers and
employees alike and includes the necessary protocols and forms. - Establish and communicate an effective ‘return-to-same’ work policy coordinated with medical treatment and work
restrictions. - Train supervisors and employees in
incident and injury prevention and what to
do when they happen. Injured employees
often seek attorneys because they don’t
know what to expect. - Develop and implement an incentive
program that rewards supervisors and
employees for working safely. Carefully
done well it will produce excellent results.
What risk management factors should be
tracked and monitored?
CEOs should develop a ‘vital signs report’
of key risk management indicators. Measure your results — what gets measured
gets managed. Monthly track your data and
weekly manage your claims-loss ratios,
loss frequency and severity, employees
with multiple injuries and, most importantly, the status and strategy to get an employee back to work and well.
In the experience modification calculation and also in real life, claim frequency
will breed severity. It is important to focus
on the small claims and near misses to prevent the large ones.
Finally, hold everyone accountable.
How much money will a quantified risk management program save?
Two janitorial clients in a tough risk management business have reduced their workers’ compensation costs by 50 percent to 60
percent. Another client in the vending
industry embraced effective components of
a risk management program, improved its
excellent core culture, and the result has
saved hundreds of thousands of dollars.
In the long run, CEOs will see dramatic
financial benefits from embracing an
immediate and long-term risk management
culture.
WILLIAM A. WERBER is a Certified Risk Manager (CRM) with
Westland Insurance Brokers. Reach him at (619) 584-6400 ext.
3254 or [email protected]. For more information, visit
www.westlandib.com.