The Secret to Lowering Your Insurance Costs!

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by Jeff Cavignac, CPCU, RPLU, ARM, CRIS, MLIS

All right, there is no secret; the answer is obvious. If you lower the cost of your losses, you will lower the cost of your 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? Maybe those firms haven’t realized the importance of a proactive risk management approach or possibly they view it as important but not urgent. Either way, they are missing a golden opportunity to improve their bottom line.

As mentioned above, the key to reducing the frequency and severity of your losses is Risk Control. Risk Control is one step in the risk management process. Cavignac & Associates has branded the risk management process as The TotalRISK Approach. The TotalRISK Approach involves four steps:

  1. Risk Analysis
  2. Risk Control
  3. Risk Finance
  4. 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. We break Risk Control in to three specific areas:

  1. Safety
  2. Human Resources
  3. Claims Management

Safety: 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, however, 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. Committee meetings need to be held regularly and need to be effective. 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.

Human Resources: Every one of our clients has HR challenges. Management of your 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. Writing the handbook, however, is just the first step; execution is critical. You have to abide by your 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 trainings (like sexual harassment prevention training) needs to be conducted.

Claims Management: 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 may become a claim before they actually do.

How Much Can Safety Really Save?

Let’s take a hypothetical $12 million mechanical contracting firm, AverageRisk Mechanical. This company has $4.2 million of operational payroll, 25 vehicles and a $10 million umbrella. This firm, with an average safety record, would pay approximately $687,250 in insurance costs. This assumes a Workers’ Compensation Experience Modification of 100% and -0- schedule credits on the other lines of coverage.*

Another hypothetical firm, BadRisk Mechanical, is exactly that. Their safety program, if you want to call it that, might meet OSHA requirements, but probably not. They don’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 their claims history. Because of adverse loss experience, their Experience Modification has ballooned to 140%! This not only costs them a lot, but it disqualifies them from some federal work which requires an Ex-Mod of 125% or less. They developed an employee handbook some time ago, but it hasn’t been updated in five years. They have regularly moved their insurance from one company to another based solely on price and now they are placed with a second rate insurance company that has debited the general liability, auto and umbrella policies 25%.

BadRisk will pay $931,000 for their insurance! This is 35% more than AverageRisk – over $240,000!

BadRisk’s competitor, GreatRisk Mechanical, takes safety seriously. Their safety program is current, consistently updated and most importantly, it works. Their safety meetings are conducted regularly and their tailgate topics are current and relevant. Every supervisor has been through their Post Claims Management Training and GreatRisk has an on-staff safety professional. Their employee handbook is current and their HR professional makes certain it stays that way. Although they market their insurance program every three or four years, they have developed a six-year relationship with their current “preferred” underwriter. GreatRisk’s risk control efforts, as you might have guessed, have paid off. Their Ex-Mod is 75% and their underwriter has also provided a 25% credit across the other lines of coverage. GreatRisk pays $515,500 for similar coverage that costs BadRisk $931,000.

So let’s put this into perspective. Assuming a 10% 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 of over 43%!

Recognize that this investment in safety by GreatRisk didn’t come without effort and cost. The key is the safety culture at GreatRisk. Safety is extremely important to the owners. They 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 hired a full-time safety professional and they pay their HR professional more than BadRisk pays their under qualified office manager who also handles human resources. At the end of the day, these investments cost GreatRisk about $100,000. The return on their investment? Over $400%! Final comment: safety pays!n

*Insurance underwriters can generally apply credits or debits of 25-40% based on the firm’s loss history and the underwriter’s evaluation of the risk.