Insurance
Improve Your Risk Profile and Your Bottom Line
By David Leng
Duncan Financial Group Vice President
I would guess that in the 20 years that I’ve been in this business, I’ve talked with or interviewed close to 1,200 corporate executives. And I always ask them the same question, “Would you agree or disagree that your premium is based on the insurance company’s perception of your risk?” Without a doubt, everyone agrees. So then I ask them, “With the underwriter determining your premium based on your risk, what does your Risk Profile look like? Is it becoming worse, staying status quo, or are you improving?” And they almost always answer, “We have no idea.”
Not knowing your Risk Profile is like trying to defend a fort from attack without knowing where your walls are the weakest and most vulnerable. You have no idea where improvement is needed to avoid the risk at hand, which in this case is causing higher insurance costs.
But when you take time to improve your Risk Profile and reduce your risks, you will ultimately drive down your rates, because when you reduce your risks, you improve your safety which will reduce the frequency and severity of injuries and accidents. But you have to remember that everything revolves around what the underwriter’s perception of your Risk Profile is.
The quickest and best way to reduce your rates, in both the short and long term, is to positively impact the underwriter’s perception. You do that by clearly conveying how much you have improved your risk and addressed claims over the past five years. And you can only accomplish that by focusing on the entire Risk Management Process.
The five-step Risk Management Process is an ongoing undertaking that involves:
- Risk Identification
- Risk Analysis
- Risk Control
- Risk Transfer and Implementation
- Risk Review and Refinement
Many insurance agents jump directly into step four-- Risk Transfer and Implementation—by quoting your insurance and transferring that risk to an insurance company. Sadly, they do not spend the time necessary in the Risk Identification phase. So how can they help you address your risks? But here’s where you take control.
Risk Identification
During this step, you really need to dig in and identify all the risks inside your organization. It’s a critical initial step because if you don’t identify the risks and gather good data, you can’t analyze those risks, nor determine how to best to deal with them, either by establishing better controls, transferring the risk, buying insurance, etc. If you decide you are going to buy insurance for this risk, you will be unable to clearly explain to an underwriter how you improved this risk, since you have not first clearly identified it.
Risk Analysis
After developing a thorough understanding of your business, your corporate culture, your operating procedures, and the risks your operation faces, you now start to move beyond insurance and towards your Risk Profile Improvement. In the Risk Analysis stage, you determine the potential impact of those identified risks by measuring and prioritizing them in order to determine if it makes sense to address a certain risk now or later, and eventually how much time, money and effort should be spent in dealing with a certain risk.
Risk Control
During the Risk Control phase, you determine which programs and processes are most effective to reduce the frequency and/or severity of that risk, and ultimately reduce the total cost of risk on the organization. You need to take the time to understand and analyze each risk which you have identified. When it comes to determining how best to control the risk, it is cost versus the benefit to the company. The goal is to have controls in place which enable you to reduce or eliminate that risk. Eventually, you will want to have programs and processes in place to improve as many of those risks as you can.
Bottom line: Why pay insurance premiums to cover small risks that rarely occur or have very little consequence to them? You should instead spend the time addressing or controlling these risks, to keep them from reoccurring. On the other hand, if you have a significant risk, the best advice is to purchase insurance or reinsurance for such a risk. But remember, the insurance company is charging you a premium based on their perception of this risk. Therefore, keep your rates down by digging deep into that risk and figuring out how best to control it, thus reducing the potential severity and its likelihood of reoccurring.
Risk Transfer and Implementation
Once you complete these steps, then it is time to implement the risk control programs and processes geared to reducing the frequency and/or severity of losses, and then conduct your risk transfer. The implementation process consists of specifically tailored programs and strategies designed to reduce those risks, which ultimately will lead to reduced insurance costs.
Once you implement these programs and processes, and improve your Risk Profile, it is time to implement your negotiating advantage in the insurance marketplace. You need to clearly and precisely convey to the insurance companies the improvements you have undertaken and that will ultimately drive down the rates that they are charging. This is also the time to look at different insurance programs and alternative financing arrangements containing higher deductibles or other strategies.
You may also realize that this is the point in which most insurance agents start the process and begin to focus on trying to sell you coverage to make a commission. However, in comparison, you are in the fourth step of a process to improve your Risk Profile, which will ultimately yield better results.
Risk Review and Refinement
It is here in which you should evaluate the effectiveness of your risk management programs, practices and resources under real-world conditions, in order to make certain the programs and processes work correctly. Remember, risk management is an ongoing process. You must continue to determine if your programs are working. If not, adjust them. You may also want to identify new risks, and then analyze and control them by implementing new programs. If you do not control your risks, you are subject to the risks controlling you.
The whole idea behind Risk Profile Improvement is to go through the entire Risk Management process cycle and continue to do so. If not, how will you know if your insurance program is adequate enough to meet your needs? By ultimately focusing on your risks, you will be able to drive down your premiums.
Some of the risks you will be able to tackle as a group, and some you may have to address individually. You just need to complete them one by one, pick away at the prioritized list of risks, and put your processes in place.
Remember, nothing happens overnight. Risk Profile Improvement is a marathon, not a sprint. It takes time, energy and commitment. But it is definitely a race well worth running.
David R. Leng, CPCU, CIC, CBWA, CRM, CWCA, is author of Stop Being Frustrated & Overcharged and vice president of the Duncan Financial Group in Irwin, Pa. He is also an instructor for the Institute of WorkComp Professionals (IWCP) and can be contacted at dleng@duncangrp.com. For more information, visit www.StopBeingFrustrated.com
