Getting Back To Basis Is Key To Hard Market Survival For Risk Managers

Risk assessment.

Risk assessment includes identifying total assets, identifying major exposures, valuing assets and resources, measuring current risk, and estimating future loss potential.

Risk control.

Risk control means developing a proactive loss control program to reduce or eliminate risks.

Strategies for risk control can include prevention, mitigation, transfer of the risk to another party and conscious acceptance.

Professional safety engineers can help with prevention strategies–identifying opportunities to boost life, fire and workplace safety.

Sometimes relatively small changes can make a big difference. For instance, one of our clients, a financial institution, had a rash of customers slipping and falling at its entrance. Our consultants discovered that the terrazzo floor became wet and slippery during rainstorms. Installing non-skid flooring solved the problem.

Many organizations have reduced or even eliminated their loss control specialistsironically, just when loss control has become more crucial than ever.

Even organizations with good loss records wont be exempt from significant premium hikes of the current hard market. Insurers increasingly factor in what they see as loss potential to get the best possible rates.

At the same time, as organizations tighten budgets and cut back expenses related to loss control, increasingly, risk managers must outsource these services. Commercial insurance brokers with in-house loss control experts and safety engineers are well positioned to provide risk managers with the services they need.

Brokers offering loss control can be especially effective because they already have close working relationships with clients that foster better communication, improved loss control and follow-up.

Risk financing.

Risk financing includes buying insurance and using insurance alternatives.

With insurers becoming more choosy about who they will cover in areas like terrorism insurance, directors and officees liability, and war-risk insurance, some businesses will choose to "go bare" of one or more of these coverages and look for new risk-control methods and new risk-financing vehicles. These include setting up reserves or funded reserves, captive insurance companies, risk retention groups, purchasing groups, large-deductible programs, integrated risk financing programs and more.

Risk managers will be called up by their board of directors, senior executives and the public to wage war against the increasing cost and the limited availability of much-needed insurance coverage.

Coverages such as financial-institution bonds, errors and omissions, property, workers' compensation and employment practices liability have become more difficult to obtain because insurers have suffered both high-frequency losses and severe losses.

What happens if insurance isnt available from traditional sources? Risk managers need brokers who can offer creative solutionssuch as using offshore markets. Consultants offering superior risk management support and strategies will enable the risk manager to reach otherwise unobtainable goals.

How much risk should an organization retain? This is always a key question, and the tradeoff between deductibles and premiums savings must be considered carefully. When insurance was relatively inexpensive, it made sense to retain less risk. Today, with much higher premiums, risk managers should consider retaining more risk.

Before determining an optimum retention level, however, the risk manager should identify and review his or her companys written policy on the forms and dollar amounts of retention to ensure that the plans are consistent with the organizations objectives and its ability to internally fund expected losses.

Most large organizations should retain their expected (predictable) losses, based on the loss history of the last five years.

Since the insurance company will charge dollar-for-dollar to cover these losses anyway, it makes sense for the company to keep the funds in its own coffers and earn income in the interimespecially for long-tail liability exposures.

Expected losses can be funded by establishing reserves or by setting up a captive and paying premiums to it.

Additionally, risk managers must continually adjust the risk management program to fit their organizations strategy. This requires not only being fully aware of the organizations current needs, but also anticipating future needs, such as expansion.

The insurance program should therefore have provisions that existing policies will automatically extend to companies that are acquired.

Lets say a company operates only in the United States today, but plans to do business overseas within two years. The risk manager and broker need to identify the new exposures the company could have and plan accordingly. If the company is entering, say, Belgium, the risk manager and broker need to research specific industry practices there.

Risk administration.

Risk administration is the process of creating a defined risk management structure, developing clear objectives, and maintaining sound communications with all levels of management.

Together, the steps of the risk management process are undertaken in support of a single goal–to eliminate uncertainty whenever possible.

The potential for loss across the entire organization must be identified using risk-assessment principles and dealt with utilizing the most effective loss control techniques availablea holistic approach, often called enterprise risk management.

An integrated risk management program offers both tangible and intangible benefits. Tangible benefits include:

Reduced likelihood of losses arising from hazardous events.
Better knowledge about organizational activities.
Lower bottom-line costs to the organization.

Intangible benefits include:

Increased knowledge and understanding about the organizations total risk exposure.
Enhanced alignment of decision-making with organizational goals.
Improved understanding and communications with senior management.

Risk management must also be dynamic. Static risk management and insurance programs can become ineffective and obsolete, exposing the organization to unanticipated losses from new kinds of risks.

Unpleasant surprises, like Sept. 11 and the Enron debacle, will upset plans, ruin budgets and put at least one risk manager on the job market. The only solution is to control the cost of risk by going back to basics and implementing the risk management process.

The place to begin is with a thorough and continuous audit of your existing risk management and insurance program. Once you learn where you stand today, you can build on your strengths and move decisively to correct any weaknesses.

Ellis J. Wilkerson is vice president of sales with E.G. Bowman Company, a commercial insurance brokerage, based in New York.

Reproduced from National Underwriter Edition, April 7, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.