The secret to lowering insurance costs is obvious. Lowering the cost of losses lowers the cost of insurance. In the long run, there is no other way. So why do so many firms not make risk management—and specifically risk control—a priority?
Those firms are missing a golden opportunity to improve their bottom line. The key to reducing the frequency and severity of losses is risk control. Risk control is one step in the risk management process, which involves:
- risk analysis;
- risk control;
- risk finance; and
- risk review and refinement.
Once risk has been analyzed and prioritized (risk analysis), it is time to implement risk control strategies to manage those risks. There are three specific areas of risk control:
- human resources; and
- claims management.
The purpose of safety, also called loss control, is to lower the frequency and severity of claims. This starts with an Illness and Injury Prevention Program (IIPP). Not only is this required by law, but if written effectively, it will be the backbone to a firm’s safety program and the basis of its safety culture.
Effective safety management needs to go much further. In most industries, firms of a certain size will want to provide supervisor safety training and establish a safety committee that meets regularly. Construction companies will want to hold weekly tailgates. Once again, the topics have to be relevant. This is just scratching the surface, but the point is that safety needs to be a priority and it needs to be strategic.
Every business has HR challenges. Management of human resources may very well be one of the most important functions that management provides. Just as loss control begins with a well-written safety program, effective HR begins with a compliant and effective employee handbook. However, writing the handbook is just the first step; execution is critical. A company must abide by its handbook. Further, nearly every section of the handbook should provide opportunities for training and improvement. Hiring, firing and discipline procedures need to be up to date, and required training (e.g., sexual harassment prevention) needs to be conducted.
Even the most well-run firms will have claims. How those claims are handled can have a material impact on the cost. Pre- and post-claim training sessions should be conducted. Management and supervisors should be taught to identify problems that might become a claim before they actually do.
How Much Can Safety Really Save?
Let’s take a hypothetical mechanical contracting firm doing $12 million in sales. AverageRisk Mechanical (ARM) has $4.2 million of operational payroll, 25 vehicles and a $10 million umbrella. With an average safety record and loss history, ARM would pay approximately $687,250 in insurance costs. This assumes a workers’ compensation experience modification of 100 percent and zero schedule credits on the other lines of coverage.
Another hypothetical firm, BadRisk Mechanical (BRM), has a safety program that barely meets OSHA requirements. It doesn’t regularly hold safety meetings or tailgates and most of the supervisors aren’t really certain what to do if there is an accident. No one in the company is directly responsible for safety. This is reflected in BRM’s claims history. Because of adverse loss experience, BRM’s experience modification has ballooned to 140 percent.
This not only costs the company a lot, but it disqualifies it from some federal work that requires an experience modification of 125 percent or less. BRM developed an employee handbook some time ago, but it hasn’t been updated in five years. It has regularly moved its insurance from one company to another based solely on price and now it is placed with a second-rate insurance company that has debited the general liability, auto and umbrella policies 25 percent.
BadRisk will pay $931,000 for its insurance. This is 35 percent greater than AverageRisk—the equivalent of $240,000 more.
BadRisk’s competitor, GreatRisk Mechanical (GRM), takes safety seriously. GRM’s safety program is current, consistently updated and most importantly, it works. Safety meetings are conducted regularly and tailgate topics are current and relevant. Every supervisor has been through post-claims management training and GRM has an on-staff safety professional. Its employee handbook is current and HR ensures it stays that way.
Although GRM markets its insurance program every three or four years, it has developed a six-year relationship with its current “preferred” underwriter. GRM’s risk control efforts have paid off. Its experience modification is 75 percent and its underwriter has provided a 25 percent credit across the other lines of coverage. GRM pays $515,500 for similar coverage that costs BRM $931,000.
Assuming a 10 percent profit margin, the average firm will earn $1,200,000. BadRisk’s profit will drop to $956,250 and GreatRisk’s profit will jump to $1,371,750. GreatRisk will earn $415,500 more than BadRisk—a delta in profits exceeding 43 percent!
Recognize that GRM’s safety investment didn’t come without effort and cost. The key is the safety culture at GreatRisk. The owners want their employees to return to their families every night as healthy as they were when they started work in the morning. Their employees know that the owners care about them. In addition, they have a full-time safety professional and they pay their HR professional more than BadRisk pays its under-qualified office manager, who also handles human resources. At the end of the day, these investments cost GreatRisk about $100,000. But its ROI is more than 400 percent.
When the cost of losses are lowered, so too are the cost of insurance. Safety pays!