How risk control can be your edge in program business

(The following article was derived from Mr. Schmidt's presentation at the Sixth Annual Target Markets Program Administrators Summit, which was held in October in Tempe, Ariz.)

The key to success in program business is to develop a product that has a competitive edge, or “hook.” While the hook often is some form of coverage or underwriting expertise, there's no reason that it can't be risk control. Indeed, such services can offer program administrators an extremely effective way to differentiate themselves from competitors.

Certainly, risk control has been a major factor in the success of Glatfelter Insurance Group, which does business as both a retail agency and as a wholesaler. We've been involved in program business for close to 35 years. Our oldest program is VFIS, which is designed for fire departments and EMS operations. We also have programs for car washes, hospices and home health care organizations, rural special districts (water, sewer, irrigation, etc.) and public entities.

By having our own risk-control department, we've found that we can deliver much more specialized service than we could by relying on insurance company risk-control reps alone. Why don't more program administrators have their own risk-control departments? Many may not be sure how to go about creating one or may be concerned about the cost. My hope in this article is to give you some ideas for getting a department going, as well as some possibilities for using insurers to at least partially fund it.

Objectives

The first goal of a risk-control department is to improve underwriting results by reducing losses among your current clientele. Depending on the size of your accounts, your risk-control department also might survey some of them before they are written. That would give your underwriters much more detailed information than they could get from an application alone and help them in their risk selection.

Another goal is to provide a value-added service to your clients. The objective is to have them look to you for help in solving their problems. That becomes your program's competitive edge and helps you stand out from competitors.

Getting started

We started our risk-control department by hiring one person–our risk-control coordinator. Depending on the size of a program, even that small step could eat up a lot of your risk-control budget, so initially you might not be able to do more.

This person must have in-depth experience in your program's class or line of business. He or she should be considered an expert by the clients, as somebody they feel confident can answer their questions. After all, if all you can do is refer clients elsewhere for answers, you're not providing much of a value-added service. Clients will figure out quickly whether you have an expert. If your coordinator doesn't know the industry's language or its unique exposures, he or she will not get very far. You will turn off your clients, and that will be the end of your risk-control experiment.

Your risk-control department must be service-oriented. Our risk-control staff performs “surveys.” We don't use the term “inspections” anymore, because we think it implies something negative that is done to clients, rather than something positive that is provided for clients. Our objective is to understand clients' operations thoroughly and to gauge their knowledge of, and interest in, safety and risk management. We want our risk-control people to be able to “sell” clients on the need for their services. We want people who can persuade, not simply order. So hiring a risk-control coordinator with the right personality is critical.

The role of the risk-control coordinator

A risk-control coordinator's first task is to analyze data to learn what's really driving losses. We probably insure more fire trucks than any organization in the country. Twenty-five years ago, company loss-control reps would conduct surveys for us. They'd come back from visiting a client and tell us: “Their trucks are just incredible. They really take great care of them.” Well, we knew that already. What we really needed was information about clients' policies and procedures for selecting and training drivers, operating vehicles, etc. We needed people who knew enough about how fire departments operate to “get under the covers” and identify what was going wrong. That's why we decided to create our own risk-control department and hire a coordinator to oversee it.

Risk-control coordinators also need to develop criteria for onsite surveys. Just which risks you survey will depend on their location, size and complexity. They also need to develop survey forms and reports that direct those doing the surveys to exposures of concern and set forth standards that clients are expected to meet.

Creating your own network

A lone risk-control coordinator can do only so much. He or she probably will survey your most critical clients–including those most susceptible to great loss frequency or severity. If you have a countrywide program, the vast majority of clients will have to be treated via other means.

One possibility is to have your carrier's risk-control people look at less critical accounts. Especially for property-oriented exposures, a carrier's risk-control people probably will work well. You also can contract with a third-party administrator that has offices around the country, although I consider that to be a less-desirable option. The problem with using a TPA's network is that you are unlikely to have much control over who conducts the surveys and how they do so. They also might not use your forms. So a better option is to develop your own network. There are plenty of displaced risk-control experts available to you. They include people who worked for insurers that are no longer in business or that reduced the size of their risk-control departments. Many of those people now work as independent contractors. For your network, you can select those with the required expertise in your program's lines and classes of business, and who are located in the areas you need to serve. You can bring them together for training, you can require all of them to use the same forms, and you can have them conduct surveys in a uniform way.

You may need separate risk-control networks for each program you operate, particularly on the casualty side. Our original risk-control network had a lot of experience in surveying fire departments and EMS operations. For a program we started for hospices and home health care agencies, however, we found they were not as effective. So we hired a clinical nurse with risk-management experience as that program's risk-control coordinator. She works with clinical nurses with similar experience around the country, who conduct our surveys. They all speak the same language; they all know what they're looking for. Our clients have reacted much more positively to them than they did to the risk-control staff we originally used.

Adding specialists to the network

You can supplement your network with specialty contractors. For instance, the people in our network for hospice and home health care services know a lot about the niche's professional, general liability and auto liability exposures, but not so much about more universal professional liability exposures, like D&O and especially EPL. So we've used an independent consultant who has considerable employment practices experience to do our EPL survey work for us. We've also used lightning consultants to work on accounts that have large IT operations. Lightning is a tremendous problem for such accounts, and the average property risk-control rep really can't figure out how to solve it.

Even with your own network, you're going to be able to deliver only so much service in person–especially if you have a national program. We probably survey about 10% of our clients. But we touch almost all of them in some way with risk-control activities–whether they are conducted over the telephone, via self-survey forms, through training programs, etc.

Resource materials

For clients, the results of our activity take two forms. First are the recommendations for bringing their operations up to a higher standard. Second–and probably more important–we give them resources and tools that can help them meet these higher standards. Just what you must offer depends on your clients' characteristics. If your clients are relatively large and sophisticated, they're going to have all kinds of resources at their disposal. But most program-business clients are small or midsize businesses and have limited resources. The more tools your risk-control department can put in their hands, the more successful both you and they will be.

Clients should be given building checklists, self-evaluation forms, model policies and procedures, etc. It's particularly important to give these tools to those accounts for which you may not be able to conduct onsite surveys. Depending on the nature of the risk, you can make the use of these tools optional or mandatory. In the latter case, you need to obtain written acknowledgment from clients that they've completed the training, implemented the procedure, etc.

But again, it's not always necessary to mandate compliance. We created a program called “Mutual Aid” aimed at exposures and risk-control practices we view as significant but not critical. We send clients a host of checklists and questions and encourage them to review them. If these tools lead them to identify any concerns, they can call us for help. The program isn't mandatory, but it's a tool they can use.

Training materials can be expensive, if you are creating them yourself. There is a host of already-produced training resources to which you can avail yourself, however. You should develop your own library of videos, DVDs and CDs. Also, Internet-based training is becoming the rage. Some of these programs are a little expensive, but may be worth looking into. Good, customized training is quite effective at forging lasting bonds with clients and creating a competitive advantage.

For each of our programs, we've created training aimed at reducing losses clients actually experience, rather than those that are hypothetical. In our emergency service program, for example, we've seen huge problems with trucks rolling over. Take a 50,000-pound fire truck worth $600,000 off the side of the road, and you'd be surprised at how much damage you can have. So we built a training program to address that particular exposure, and have encouraged clients to buy into it.

We think we also have excellent insurance-to-value. For each of our programs, the risk-control department creates standards of what we think the average square-foot replacement cost of a building should be, given its characteristics and location. Then we perform calculations to make sure that our clients purchase adequate limits.

Relationships with agents and brokers

In delivering risk-control services to clients, we are mindful that they are first and foremost the clients of the retail agents and brokers who bring them to us. We know where the boundaries are in the relationships among all three parties, and we are careful to respect them. There are times when we do interact closely with our clients. For example, on our largest clients, we have what we call “continuing service,” which is not just limited to an onsite survey every few years. Our risk-control people may meet with these clients a few times a year, whether in person or by phone. In these cases, we have an open, direct exchange with the client and develop a close working relationship with them. We don't view this as overstepping our bounds. In these situations, we're providing a value-added service to the client, which is viewed positively by the retail broker.

Of course, we also keep agents and brokers informed of our survey activity. After a risk is surveyed, the surveyor goes over the results with the client in an “exit interview.” Later, we prepare two reports. One is an internal report containing detailed information for our underwriters. We mail a different report identifying any recommendations developed from the survey to the client, with a copy to the retail agent or broker. If action is required, we follow up with the agent or broker. When something really difficult must be communicated to the client, it's always best to do so through the agent or broker. Our procedure is to have the risk-control department do the initial follow-up. If they can't obtain a response or compliance, the matter is referred to the underwriters for a decision. If the matter is critical enough, the underwriter will contact the agent or broker. If it isn't, the underwriter may decide to waive the recommendations and move on.

Risk control, claims and underwriting

An important objective of our risk-control efforts is to have all our clients present similar underwriting characteristics. Instead of trying to distinguish one risk from another, we attempt to bring them all up to the same standards. The goal is to end up with a book of clients that are truly homogeneous–not only in regard to the industry they're in, but also in how they operate.

Our claims department also is an important contributor to both our risk-control and underwriting departments. If, during the settlement process, our claims department becomes aware of an issue that should be a concern to the underwriters, it gets reported. The underwriters then seek a solution to the problem–one that could well include risk control.

Funding the risk-control department

In general, we do not charge clients for risk-control services–certainly not for surveys that have an underwriting, as well as a loss reduction application. We do have an educational training department that goes a lot further than traditional loss control, and for some of its programs we do charge–especially when they're offered to non-clients. But as a rule, we don't believe clients should be charged separately for risk-control services.

Rather, we budget about 1% of our premiums for risk-control. If you have a $50 million program, 1% will enable you to fund a lot of things. If you have a $10 million program, on the other hand, a 1% risk-control budget gets stretched pretty far, pretty fast. One alternative for program administrators who have multiple programs is to move some of the risk-control funds around. If one program has a large premium base or simple risk-control needs, perhaps its needs can be met at relatively low cost, freeing other dollars for risk control in another program.

I also would argue that it's not unreasonable to allocate a portion of your marketing budget to support risk-control activities, because they do reduce losses and help create the kind of competitive advantage that the marketing department is looking for. Another way a risk-control department can advance marketing objectives is by providing authoritative speakers for association meetings or for individual clients.

Money also might be available from your insurers. Carriers allocate a certain amount of money from a program administrator's book for risk control. You might be able to persuade them to give those funds to you for your own risk-control department, rather than spend them on carriers' “generic,” less-effective risk-control efforts.

Even if you can't persuade your carriers to help fund your risk-control department, I'd make every effort to create one. After more than 30 years of operating our own risk-control department, our investment has been repaid many times in the enhanced reputation we have within the industries we serve.

Mark Schmidt is president of insurance company operations at Glatfelter Insurance Group. He is responsible for all aspects of underwriting, policy administration, product development, program management, risk control, distribution management, licensing, compliance and reinsurance for all Glatfelter programs. Those programs have more than 25,000 clients in 49 states. Mr. Schmidt also spearheaded the formation of Glatfelter's agency captive in 1994.