Loss Control Solutions Boost Buyer Profits

Why is it that a manufacturer will put the screws to a vendor for a relatively minor price concession but will completely overlook a flawed production process that has a much bigger impact on the cost of doing business? The answer is a faulty understanding of the cost of risk.

Cost of risk includes insurance premiums, paid deductibles and all of a customer's uninsured consequences, such as loss during a plant shutdown. Although this is a familiar concept to most risk managers, it has not traditionally been associated with safety, loss prevention and other risk control services.

In fact, there is no more important element of a successful risk control engagement than a clear understanding of the cost of risk. This is the baseline from which we measure the impact of our services in terms of time, people and dollars.

For example, if the client has heavy exposures to workers compensation risk, the cost of risk baseline might be based on such factors as workers' comp cost per man hour worked.

The cost of risk, however, is not necessarily insurance-related. Our ergonomic specialists analyzed the costs and risks associated with moving materials used in the production process of one of our manufacturing clients. By installing an overhead lift and trolley, the client was able to reduce associated labor costs by 81 percent and lower overhead lifting risk factors by 90 percent. The payback period for the new equipment was less than three months.

With still another manufacturing client, we analyzed the risk associated with using scissors to cut batting material. By simply replacing ordinary scissors with ergonomic scissors, the client increased output by 2.5 percent, while reducing a major wrist injury risk factor by 60 percent.

There are two significant issues that need to be managed as clients integrate cost of risk concepts with risk control strategies.

The first is the tendency to define the cost of risk too narrowly. While most clients are well aware of their insurance costs, much more significant is the "opportunity cost" of flawed, unsafe practices on efficiency, productivity and quality. Comparisons to industry best practices are one way to estimate these costs.

Another issue is a lack of understanding of cost of risk concepts by people on the front lines. It is not enough to quantify the cost of riskthis information needs to be communicated to the people who can impact it directly. One of the key tasks for risk control professionals is to work with clients to build a broad understanding of cost of risk and communicate the progress being made to reduce it.

The fourth factor of a successful risk control engagement is technical expertise. I consider this to be the final factor, because without the support of the preceding three factors, it is very difficult to translate technical expertise into improved quality, efficiency and productivity.

There are several dimensions of technical expertise within risk control. The first involves a strong knowledge of specific risk control disciplines. For example, a strong workers comp risk control consultant will have in-depth understanding of workplace hazards, safety, environmental risk factors, ergonomics, industrial hygiene and organizational culture, dynamics and accountability. Within product liability, risk control professionals need to understand product liability litigation, product safety design concepts, inspection and quality control, warnings and instructions, and user/machine interface.

Another key dimension of technical expertise is industry-specific. Risk control professionals cannot be effective without a sound understanding of the specific operations of their clients, including their manufacturing, processing, distribution and other operations.

In the case of product liability, for instance, food processing companies and restaurants may implement a special product safety protocol known as HACCUPHazard Analysis Critical Control Point. This is a very detailed and documented quality control program that food businesses may undertake voluntarily or in response to federal requirements. A risk control consultant who is familiar with these specialized requirements is able to add great value to these clients.

The importance of specialization within risk control is why we have risk control consultants who are dedicated to construction, marine, manufacturing, electrical power generation and primary metal processing, as well as various professionals, including health care providers, lawyers and accountants.

Certainly, every risk control engagement is different. But the four key drivers apply in virtually all situations. Risk control professionals who settle for the role of safety inspector are short-changing themselves and their clients. Our job is all about profitable risk control solutions that impact efficiency, productivity and quality.

Frank L. Keisler Jr. is senior vice president of risk control at Chicago-based CNA, where he has responsibility for risk control best practices for the company's commercial property and casualty business.

Reproduced from National Underwriter Edition, November 11, 2004. Copyright 2004 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.