How to find the total cost of risk — and do something about it

When it comes to driving down your company’s risk management costs, employers may not always see the whole picture. In fact, depending on your individual business, you could save 20 percent of your insurance spend by focusing on additional risk cost drivers outside of your insurance premiums.

Six buckets of risks drive costs:

  • Insurance premiums.
  • Program structure.
  • Losses within a deductible/retention.
  • Uninsurable or uninsured losses.
  • Coverage gaps.
  • Contractual liability.

Most employers regularly manage their insurance premiums and program structure. The other cost drivers tend to slide under the radar.

“There’s no trigger that says I’ve got to be thinking about this right now — unlike your annual insurance renewal,” says Marshall Wunderlich, area president at Gallagher.

In other words, there’s no annual physical for the other cost drivers, even though they factor just as much into your total risk costs.

Smart Business spoke with Wunderlich about how to add the necessary checkups on all risk cost drivers to build a comprehensive risk management program.

Which companies are more successful at examining the total cost of risk?

The organization needs somebody who takes ownership for examining the frequency and severity of risk, with a process that’s connected to the business’s culture. Typically, that person is a risk manager in larger companies, or somebody on the executive team of a smaller company who has a passion for it.

How can organizations without an internal risk manager better manage these costs?

The solution is to find a risk adviser you trust who has the process down to a science, so you don’t have to. Your risk adviser needs a process that holds him or her accountable for delivering on measurable objectives on all these risk areas that drive your costs.

It’s not uncommon to find risk advisers who say they focus on more than your insurance program. It is uncommon to find firms that have it in their DNA and do it all the time for middle-market companies.

What are examples of manageable risk costs that can be decreased?

If you have a fleet of vehicles, you may decide to self-insure your first layer of risk with a high deductible. Then, you need to manage those costs as they come up, by asking questions. Should you be going to different garages? Why is a particular driver wrecking his vehicle multiple times?

These kinds of questions also can apply to safety costs. What’s your spend on personal protection equipment? Is it more cost effective to buy in bulk once a year, rather than as needed?

It’s a good idea to review your claims management process. Who is involved and when? How long does it take to report it? Who is communicating from the accident investigation back to the safety committee?

The same thing applies to contractual liability. As you enter into contracts, you are assuming risk. Somebody needs to be reviewing the language and tracking certificates of insurance.

Even if you’re reviewing trends, a deeper look may be warranted. If you had 100 claims last year and 70 this year, that’s good, right? But what’s driving the 70? Are there common denominators? How are you going to get from 70 to 35? Should you really feel good about the 70, or do your peers only have 10?

How can companies get started on this?

Executives understand that comprehensive risk management is important. There’s only so much you can save through insurance brokering. But it doesn’t have to be overwhelming or time consuming.

Start by identifying the top three to five risks that aren’t covered by your insurance program. Then, the next time you meet with your risk adviser, ask for help putting together a process to deal with them.

You’re paying your risk adviser to help you with costs that you’re insuring every year. So, create a relationship where you’re communicating regularly on these other buckets of costs. Then, agree on the objectives to be met and the process for holding each other accountable for the results.

Insights Insurance/Risk Management is brought to you by Gallagher