New OSHA rules reshape drug testing and filing requirements

New rules, under the Occupational Safety and Health Act (OSHA), will have widespread ripples in the business world this year.

“Big changes are coming to drug-testing policies and the way injuries and illnesses are reported — and there are a lot of nuances that employers need to make sure they are following within the new legislation,” says Josh Daly, ARM, a risk management consultant at Arthur J. Gallagher & Co.

Smart Business spoke with Daly about what these OSHA changes mean for employers.

What are OSHA’s new recordkeeping requirements?

In order to prevent work-related injuries and illnesses, OSHA has for decades required almost all employers keep track of their work injuries and illnesses in an OSHA 300 log. This information was internal and only provided to OSHA in the event of a physical audit or written request. Now, certain employers also must log on to OSHA’s website and submit this recorded information electronically.

The idea is that this will nudge employers into improving workplace safety and health, because the information ultimately will be posted to OSHA’s website. OSHA also plans to use this for its own data analysis, helping it spot trends that need to be addressed, including potential audits with certain employers.

While OSHA claims all personally identifiable information will be removed when the data is posted, employers need to understand they’re creating a permanent record that can be used as a competitive advantage or disadvantage after it’s been publically disclosed.

Who needs to file these electronic submissions?

If your organization has a single physical location with 250 or more employees and has been required to keep records previously, you will have to submit this data.

In addition, if your company has between 20 and 249 employees and you are in what OSHA deems a high-risk industry, you have to submit this data. The term ‘high risk’ applies to more industry classifications than you may think. For example, a variety of grocery stores, department stores, general rental centers, food service distributors, etc., will now be required to post this information.

If you’re already tracking this data and you fall into one of the two required categories, make sure your recordkeeping is in an easily transferable electronic format. It’s also a good idea to spend more time reviewing this data to verify accuracy, before you submit it.

What do employers need to know about the new OSHA rules on drug testing?

Under the new law, OSHA has ruled against mandatory ‘blanket’ post-accident drug screenings for all employers. It believes that employees don’t report legitimate workplace injuries because of these policies, and therefore they are retaliatory.

OSHA’s comments seem to indicate drug testing can be administered when there is a reasonable belief of drug use, such as a motor vehicle or forklift accident. This rule doesn’t apply if you have to drug test for a state or federal guidelines, such as a mandatory post-accident drug test as part of a commercial driver’s license. And you can still continue pre-employment drug testing and random drug testing.

Since enforcement of this law began Dec. 1, 2016, it’s a good idea with this increased scrutiny to remind all your employees — not just senior management — of your organization’s anti-retaliation practices, and document the discussion.

Also, consult your risk management professionals and legal counsel to verify that your internal policies and procedures, including safety incentive programs, are reasonable and in compliance with OSHA’s revised stance on workplace retaliation.

With workplace incidents now requiring independent review, it will be important to set up an efficient assessment process to ensure that the testing that is still allowed is completed in a timely manner.

While these changes won’t significantly alter your existing responsibilities, they increase the risk of a citation and need to be considered as your organization evaluates its risk management programs. For the complete list of changes, visit OSHA’s website.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.

Every business has cyberrisk. What are you doing about yours?

Many employers underestimate their risk of a cyber breach and the overall cost of cyber claims.

Data breaches have increased 23 percent in the last year, according to the Symantec Internet Security Threat Report 20. The average cost of a data breach also is now at $4 million, the Ponemon Institute’s 2016 Cost of Data Breach study found.

“With the rising number of breaches and costs associated with them, cyber insurance should be a key component in every company’s insurance portfolio,” says Angela Corcoran, client service supervisor at Arthur J. Gallagher & Co. “If employers don’t have cyber coverage, now is the time to reach out to their insurance advisers. For those employers who’ve already purchased cyber policies, it is important to ensure that their limits are adequate to cover their risks.”

Smart Business spoke with Corcoran about the latest cyberrisk developments.

What risks can cyber insurance cover?

Every organization has some sort of cyberrisk, even if it isn’t transacting business over the internet. Any entity that interacts with the public or hosts a website has cyber exposure. Any employer that collects even a minimal amount of personally identifiable information is at risk of a privacy liability claim. Additionally, all employers are vulnerable to cyber extortion — a threat of a cyberattack on their website or computer systems in exchange for money.

Cyber policies are designed to insure against these scenarios and more. Most policies provide first-party coverage, which responds to direct losses to the insured, and third-party coverage, which is designed to cover the insured’s liability to others.

Also, cyber policy components provide coverage for things like network security, privacy liability, breach response, media liability, extortion, etc., which can be tailored to fit each employer’s particular risk. For example, retailers or businesses that accepts credit card transactions can buy PCI Assessment coverage that will pick up costs associated with assessments against the company for breaches of Payment Card Data Security Standards. The appropriate limit is partially determined by the number of credit card transactions each year and the company’s PCI compliance level.

How can an employer determine what level of insurance to get?

There’s no magic formula to determine the proper amount of cyber limits. Every business is unique. Employers can reach out to their insurance advisers who should have tools and models that can help drill down to appropriate limits based on their exposures.

What’s happening with the coverage prices?

A year ago, cyber rates were increasing rapidly, due to high-profile data breaches. In the past six months, rates seem to have stabilized; however, expect continued rate fluctuation as claims evolve.

Are there emerging products that employers should watch for in 2017?

Cyber insurance is ever evolving. As cybercriminals get bolder and more sophisticated, new exposures arise, forcing insurers to constantly revise their underwriting and claim handling approach.

A recent addition to some cyber policies is social engineering coverage, sometimes referred to as fraudulent impersonation or cyber deception. Coverage is provided for the deceptive misleading of a company’s employees into releasing funds or confidential information to an illegitimate third party. This can happen when an employee receives a fraudulent email that looks like it’s from the CEO. The email requests funds to be wire transferred to an account, and only afterwards, does the employee realize that the email was a fraud. Social engineering coverage can sometimes be added to crime policies as well as cyber policies. All employers should consider this, as all companies are vulnerable.

What else would you like to share?

Many employers have a false sense of comfort in response plans that have not been adequately tested. It’s a good idea to sit down with senior management, key personnel and insurance advisers for a tabletop exercise, a ‘fire drill’ to simulate the company’s response to cyber claim scenarios. This allows employers to vet their current response plans, identify shortfalls and focus on where changes can be made, in order to strengthen their response to potential cyber claims.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.

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 Robert Zedreck, area vice president at Arthur J. Gallagher & Co.

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 Zedreck 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 that 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 that 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 piecemeal 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 have 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 Arthur J. Gallagher & Co.

How to chart your risk course with a risk heat map

As a business leader, you deal with risks in your business every day. Inherently, you take steps to mitigate those risks. So, when you and your risk adviser conducted your most recent risk heat mapping session, did the process help you and your team prioritize your approach to managing your business risks? If you haven’t had such a session recently, please read on.

Smart Business spoke with Dereck M. Malzi, area assistant vice president at Arthur J. Gallagher & Co., about how risk heat maps work and why business leaders should take a fresh look at their organization’s risks through a different lens.

What exactly are risk heat maps?

A risk heat map plots risk points on a grid. The horizontal axis measures the impact of the risk, and the vertical axis measures the frequency of occurrence. If business leaders plot a risk close to the axis intersection — normally 0,0 in geometry — they believe that risk is not impactful and not likely to happen. The other extreme is the graph’s top right-hand corner, which plots risks that would be very impactful and very likely to occur.

riskmap_ajgOnce the scatter diagram is assembled, the map is color coded to identify risks as insurable, partially insurable and uninsurable in the traditional insurance marketplace (see simplified version to the right).

Risks to be plotted include traditionally insurable risks such as workers’ compensation and products liability, as well as other risks that may need attention prior to a catastrophic event. Examples include loss of a key customer or supplier, loss of reputation, loss of a license, copyright infringement and other risks you may be aware of and have learned to accept. Then there are the blind spots:

Risks not brought to your attention, such as recent regulatory changes in a territory that you do business but aren’t necessarily briefed on routinely. It can be somewhat surprising what is uncovered during the collaborative process.

Then the conversation shifts to what actions need to be taken to address those risks. Some can be transferred to insurance companies by endorsing a policy. Others can be transferred in a contract. Some can be engineered out of the business through training and some can be avoided with a change in strategic direction.

Why don’t businesses already do this and what is a risk adviser’s role in the process?

Risk heat mapping isn’t new, but many companies aren’t utilizing this tool. They may not be aware of it, feel too busy to bother with it or think it won’t help them.

That’s where a risk adviser plays an important role. He or she should guide you through a risk treatment and response plan, in order to avoid, prevent, reduce, transfer or retain the risk. The goal is to avoid surprises, spend your insurance dollars efficiently and utilize the most effective risk management tools at your disposal.

You may find yourself becoming more or less comfortable with a certain risk; but you will make an informed decision on the best way to deal with it. You don’t want to fall into the routine of automatically renewing the same basic insurance program on the theory that — ‘Well, it was good last year, it’s probably good this year.’

How long will it take to create a map?

If the right people are in the room for 90 minutes, you could end up with a good draft of a risk heat map. Then, it’s a matter of determining who is going to run with what and how to implement your action plan.

When is the best time to start the process?

There are two preferred times: (1) just before you start the insurance program renewal process. Typically, five months before renewal, you meet with your broker to talk about the insurance market and set a renewal strategy. If you back that up 30 days, you can start the conversation at 180 days with a risk heat map discussion. The map is then used to form your renewal strategies. By the time you renew your insurance, six months later, well thought out decisions inform your choices and you have specific action plans for dealing with your risks. Or (2), another good time would be a company retreat or strategic planning session with the executive team and/or board.

A risk heat map may confirm what you’re doing, save you from a blind spot or help you reprioritize your risk management plans. It’s a relatively small investment of time for the potential rewards you will discover.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.

How to cover foreign risk — before it hits your company bank account

In today’s global economy, most businesses have some type of foreign risk exposure whether it’s exporting goods or services to foreign countries, opening or acquiring operations outside its home country, or even sending employees overseas to conduct business on behalf of the company.

That’s why you need to understand your risk exposures and then transfer that risk to an appropriate insurance program, so that you are not unknowingly self-insuring or even over-insuring, says Marilyn Salley, client executive at Arthur J. Gallagher.

Smart Business spoke with Salley about how to minimize your company’s global risk.

What trends are you seeing with global risk?

Unfortunately, some businesses are finding that they don’t have the right coverage in place until after they have a claim.

Not all insurance policies are created equal.

A ‘standard’ commercial general liability policy purchased for operations in the United States has very specific coverage territory limitations. For example, if a domestic business had a product liability claim that occurred in the United States, it would be covered because the standard territory includes the United States (and its territories), Puerto Rico and Canada. If this business also sold goods in Mexico, the United Kingdom, China or any other country, the business would be self-insuring for that same loss if it occurred outside the covered territory — unless a worldwide endorsement was added to the policy. This type of endorsement must be negotiated and is usually only available for incidental sales.

How should a U.S. based company cover risk exposures outside the United States?

Businesses should purchase a foreign insurance package for risk exposures for travel, sales and operations outside the United States. This can be a very cost-effective approach to transfer risks related to foreign general liability, foreign automobile liability, foreign voluntary workers’ compensation, travel accident/sickness, kidnap and ransom and terrorism.

What should you look for when purchasing an international insurance package?

Insurance rules and regulations vary dramatically by country. It’s extremely important to make sure the coverage is broad and tailored to the countries where your exposure exists.

A business with local foreign operations must consider whether insurance is compulsory, legal and taxable. For instance, a U.S. business that has a local operation in China — even a small sales office — should have a master foreign package policy, in addition to a local policy that is issued in China by your U.S. brokers local office. In China, non-admitted insurance is illegal, and violators are subject to fines and/or incarceration.

Every country has its own regulatory guidelines for insurance. When the local policy is placed, make sure you’re receiving a policy digest in English, so you know what you have purchased.

Why is it important for businesses with employees who travel to have a foreign package?

In today’s world, it’s important to have all of the appropriate insurance in place to protect your assets and your employees. When you have employees traveling overseas, it’s imperative to have travel accident/sickness coverage as well as kidnap and ransom coverage. This would be in addition to foreign voluntary workers’ compensation, automobile and more.

In some countries, if a medical evacuation is required, the individual must provide a credit card before services will be rendered. This can be truly impossible due to circumstances and extraordinary costs. A business can transfer this risk to the insurance carriers and take the burden off employees.

Through the use of technology, an employee can now download the carriers app and obtain local assistance for any need, whether it’s medical assistance, personal assistance or travel assistance.

Is this something midsized companies can do, when they don’t have as many resources?

Of course, this level of service is totally open to midsized companies. Partner with a risk adviser today that can seamlessly provide an integrated insurance program, regulatory guidance and local resources across the globe.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.

How a new point of view can help you be an employer of choice

Have you ever squeezed a balloon and watched the air bulge out the other side? This metaphor explains how many companies manage employee benefit risks, says Gus Georgiadis, area president of Gallagher Benefit Services at Arthur J. Gallagher. But a new approach can help your organization be a more attractive place to work.

“Employers that are in that top tier of being able to attract and retain talent, and in earning the right to say that they are an employer of choice, they are the ones that are managing their risks across the entire organization,” Georgiadis says.

Smart Business spoke with Georgiadis about how to minimize benefit risk with a horizontal approach.

What do you mean by managing risks across the organization?

You need to focus on your total employee rewards. Employees benefit from various types of non-wage compensation, beyond direct compensation, and an employer will incur expenses as a result of these. You need to manage the risk side of these expenses, whether it’s a leave policy, long- or short-term disability policies, paid time off, absence management, injury protection or workers’ compensation programs.

Top employers manage the risks of these programs to ensure that they are 1) competitive and 2) cost affordable. Because as program costs rise and talent becomes more competitive, organizations have to think holistically about the total rewards, in order to attract and retain top talent.

Why do employers often fall back into vertical management?

Historically companies have been organized within their management teams around vertical components. Human resources manages health benefits, the CFO suite has responsibility for elements of risk management, and yet another person from production oversees safety and workers’ compensation. Even smaller organizations, where people wear multiple hats, must shift their thinking.

There isn’t enough cross-pollination to see if a policy in one area can help another, or if a trend might indicate a larger problem. For example, an employer might focus solely on medical costs and shift first dollar responsibilities to employees with a qualified health plan. But management also has to consider how that could affect diabetics. Employees might not do what’s necessary to manage their diabetes with higher out-of-pocket costs. This in turn can affect their ability to come to work and be productive.

Another example is opioid use. In an ideal setting it’s intended for pain management and to get people back to work, but there are issues of dependency or having medicated employees at work, which could lead to workplace safety or productivity issues. You can’t tackle a problem in isolation, because there’s a cause and effect across the organization.

What best practices can business owners use to collectively manage these risks?

The forward-thinking companies, regardless of how they are organized, come together to evaluate data and consider trends and strategies to ensure that they’re not missing opportunities. Organizations should bring together the key decisions-makers and stakeholders to think through these issues in a collaborative way.

The data analytics has to be populated not just with medical and pharmacy, but also with long and short-term disability, absence and workers’ compensation data. Musculoskeletal claims, for instance, might impact absence management or disability, while also suggesting a workplace issue with the production line.

Larger organizations have access to more data analytics, but common sense can provide the same conclusions. Consider the use of vendor summits, where you periodically bring your vendors together, in order to identify commonalities and pull the thread on issues across those vendors. It allows the organization to have dialog and consider ways to tackle problems.

If you seek out help from expert risk managers to rethink your approach, it can help the entire spectrum of risk. You will begin to understand the true implications of each decision, and in turn ensure your programs are more viable, cost effective and geared toward being a place where people want to work.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.

Technology provides new insights for employer claims advocacy

Imagine you own a national restaurant chain, and a customer with a tomato allergy comes in and eats your guacamole, which has tomatoes in it. She puts in a claim against your company.

So far, this isn’t an uncommon scenario. But what you didn’t know at first is that this customer was a professional actress, who listed one skill as being able to cry on demand. Also, before she left the restaurant, she started a GoFundMe account to ask for money because she had to go to the emergency room and couldn’t afford the bill.

Business owners don’t have the time or skills to investigate questionable workers’ compensation or general liability claims. They need to focus on their business.

“You need someone to fight on your behalf. You need someone to get the documentation of what’s really going on,” says Kerry Stafford, Northeast regional claim manager at Arthur J. Gallagher. “You need someone to be an extension of your staff. Does this claim make sense? If it doesn’t make sense, let me dig in and use social media and surveillance.”

Smart Business spoke with Stafford about claims advocacy, including how technology provides new opportunities to find the truth.

What do claims managers like yourself do?

Claims advocacy is an added benefit at some insurance brokerages. They have the time and know-how to investigate questionable claims. They can better position an employers’ case, especially with the increased use of technology and social media. Claims advocates work on your behalf, peeling back layers like an onion, to find out what’s really going on and then provide that documentation to the insurance carrier. They also can help you determine if you should deny a claim, or position your organization for a lower settlement.

Don’t insurance companies check this?

Insurance carriers usually have to pay an outside vendor to investigate claims. In addition, their case adjustors have high caseloads and don’t really have time to look in depth.

With questionable claims, how would an employer know what red flags to watch for?

For a worker’s compensation claim, you should investigate further if the accident was not witnessed, or involved a short-term employee, an employee getting ready to retire or an employee who has been involved with prior claims. With a general liability claim, again a prior history of claims or no witnesses should throw up red flags.

You may or may not have video; but if you do, make sure you pull it before it gets erased. You also may not know that someone has a history of submitting claims, but your claims manager can search court records or other resources to trace past settlements.

If something doesn’t smell right, then start asking questions and get a good claims advocate to help you uncover the real story.

What are examples where technology has changed the way employers can protect themselves from fraudulent claims?

It’s amazing how often people post on social media — Facebook, Twitter, Instagram, etc. — and contradict what they claim.

They can be out of work because of a shoulder injury but still post pictures that show them paddle boarding in Myrtle Beach. One questionable claimant sold goods on Etsy and made money babysitting, while claiming to be too injured to work. Are they out shoveling snow with a supposed bad back? Have the missing construction tools showed up on Craig’s List? Did they cancel an independent medical exam, but then post that they went for a new tattoo?

Some cases are legitimate, but you want to be positioned correctly for the settlement. For example, a retail clerk was beat up while at work. Years later, the company was about to offer a multimillion-dollar settlement because she allegedly couldn’t see or leave the house. However, Facebook showed her dancing on a bar with drinks in each hand, which allowed the business to decrease the settlement amount.

Also, to utilize technology even further, drones can be used for surveillance.

As a business owner, you know there’s a probability of fraudulent claims, for both general liability and workers’ compensation. Not only might you pay a high settlement that affects your bottom line, that settlement in turn affects your insurance rates and reserves. Make sure you’ve got someone in your corner to help you find the truth.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.

With contracts, know what you’re agreeing to before you sign

“People think their insurance is always going to be there to back them up,” says Alan Pepoy, CPCU, ARM-P, risk technical specialist at Arthur J. Gallagher. “But in a broad form hold harmless agreement you can agree to accept risk that is essentially unlimited.”

Imagine this: One of your employees is substantially injured and puts in a sizable workers’ compensation claim. The injury resulted from a condition that was created by another company, let’s say ABC Corp. So, your employee — with the help of his or her attorney — sues ABC Corp. for “pain/suffering” based on the fact that it negligently created and allowed the condition to exist.

Your contract with ABC Corp., however, included a hold harmless or indemnity agreement that requires you to indemnify it for any and all claims. Your general liability insurance provides defense and coverage for ABC Corp. based on the hold harmless language, even though you didn’t create the negligent condition. But now you’re on the hook for a million dollar loss. Scenarios like this can happen because contracts open up your company to many potential exposures.

Typically there’s a conflict between obtaining business (sales) and managing risk. Sales may be pressured to get new business, even if it means accepting unreasonable risk. Instead, you want to balance sales with risk — not have your sales force promising anything and everything to get a deal.

Smart Business spoke with Pepoy about how to minimize the contract risk that can significantly affect your bottom line.

If a company doesn’t comprehensively manage its contract risks, what can happen?

You may be accepting risks that aren’t insured or diluting your coverage and limits because you’ve shared the value of that policy with third parties. Most policies are written on a ‘per occurrence’ basis subject to an aggregate limit, so after X number of claims, you could exhaust your limits and thereafter be uninsured.

In a worst-case scenario, you could jeopardize your company’s financial stability if you don’t have the wherewithal to pay a significant claim once a policy is diluted or you face an uninsured loss.

Which companies are the most affected?

Midsized companies that routinely enter contracts, such as construction, lease, service and vendor agreements, etc., are the most affected. You can sign a contract that has myriad requirements that doesn’t coincide with your insurance. You may even be extending your insurance to cover another party’s negligence.

Larger companies often have more stringent wording and won’t let you change the contract wording if you want their business. It’s important to attempt to negotiate. If that doesn’t work, at least be aware of the risk, so you’re not caught off guard.

How do you recommend business leaders manage contract risk?

Make sure all agreements — sales contracts, purchase orders, purchase agreements, etc. — are reviewed by your legal adviser, risk manager and insurance broker before you sign. They will point out areas of concern. Then, it becomes a business decision of whether the risk is acceptable or not.

You want a systematic process to transfer risk, via contracts, to third parties up and down the supply chain. If you’re dealing with a contractor that cannot pay the premium for the type of coverage you want them to have, it might be time to look at larger companies.

Make sure your organization not only reviews the documents and contracts but also the certificates of insurance.

It can be time consuming to set up the proper insurance coverage and wording. Once you’ve made the initial investment, especially if you have the right advisers, it’s not onerous. But it has to be done consistently. For years, nothing may happen; when it does, it’s usually a major claim.

If you do accept risk, consider how to avoid it. With loss control, you can increase the presence of safety to make an occurrence less likely. The problem is that when you accept risk from another company you may not have control.

It’s time to pull your sample contracts and get them to a competent risk adviser to have a discussion about what risks you’re actually taking on.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.

Reduce your insurance spend with a group captive

Although group captives have been around for a long time, there’s additional awareness today as business owners and risk managers focus on gaining further advantages over their competitors, says Lori Armstrong, CPCU, ARM, area vice president at Arthur J. Gallagher & Co.

Group captives allow a business owner to reap financial rewards beyond those that are available in the traditional insurance marketplace. Underwriting profits that normally are retained by an insurance carrier are returned to the captive owners.

Smart Business spoke with Armstrong about how group captives work and when they make sense as an alternative risk strategy.

What types of group captives are available and what risks do they typically insure?

Group captives can be heterogeneous or homogeneous. Homogenous programs allow like-minded companies in similar industries to come together to reduce their insurance premiums. Heterogeneous programs can be an excellent way to reduce costs and spread risk over different classes of businesses that are best in class and committed to safety.

Captives typically insure a portion of the casualty coverage for workers’ compensation, general liability and automobile. Catastrophic exposures are still transferred to a traditional insurer.

What are the benefits of joining captives?

A group captive considers a member’s — or potential member’s — historical loss experience to develop a premium, versus charging rates based on industrywide loss experience. Therefore, captives offer performance-driven pricing. When is the last time an insurer returned automobile or liability premiums to you based upon your loss experience? If you are effective at controlling claims, your net costs in a captive will be lower than most in your industry. Additionally, your premiums over the long term (three to five years) are less subject to insurance market fluctuations.

In addition to lower costs, captives allow members to take control of decisions that are typically dictated by insurance companies: coverage terms, deductible levels, claims service providers and safety initiatives, to name a few. It also can be a way to purchase coverage that’s unaffordable or not available in the standard marketplace. Finally, captives provide a forum for business leaders to exchange ideas and share best practices.

Are group captives more work?

No. The captive hires a captive manager to handle the day-to-day operation of the captive. Members send a representative (usually the owner or CFO) to attend the board meetings — typically two per year. Those members elected to serve on the executive board may have some additional time spent in those roles. This time commitment is typically less than the time CEOs and CFOs spend securing insurance in the traditional insurance market each year.

Which companies are best suited for these?

As a rule of thumb, companies that: (1) spend a combined total of $300,000 per year in workers’ compensation, general liability and automobile insurance premiums; (2) that want more control over these costs; and (3) are committed to continuously improving their safety culture.

What do business owners need to consider when joining a group captive?

Not all captives are created equal. You will want to be comfortable with the make up and size of the group. Captives can be similar in size of premium, revenues or numbers of employees.

It’s important to examine the retention levels, which is the amount you pay before reinsurance kicks in.

Take time to review the historical performance of the captive. How much risk sharing exists among the members, and does that amount match your risk tolerance? Have there been any assessments made to members? Also, evaluate and understand the policyholder returns — the underwriting profits returned from the captive — to gain a sense of the pricing adequacy.

Group captives are a useful tool for many companies who want more control and consistency with their insurance, especially if they have better than average loss ratios and a high commitment to safety. If this sounds like you, talk to an experienced captive management company and request a feasibility study.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.

What’s in store for your commercial insurance renewal in 2016?

With political uncertainty and stock market declines, CEOs and CFOs are wondering how these factors will affect their risk management costs and ability to secure competitive insurance options.

“The good news is that insurance companies are doing relatively well, despite the economy and stock market,” says Marshall Wunderlich, area president of Arthur J. Gallagher & Co. “They haven’t been hit with as many catastrophic losses as they priced for.”

And when insurance companies profit, that means competitive pressures should lead to premium decreases for customers.

Smart Business spoke with Wunderlich about trends in the property and casualty markets that employers should be aware of.

What can business owners expect for their 2016 property and casualty (P&C) insurance renewals?

In general, 2016 will be a year of flat or reduced premiums for many lines of insurance coverage in the P&C marketplace. The drive for market share amongst both the national and regional carriers will continue to create competitive rates and capacity in the coming year.

Unless you have sustained multiple years of poor loss experience; have significant catastrophic exposures in areas such as Florida or California; or your industry is driven by emerging exposures and claims experience like cyber or professional liability, you can anticipate competitive renewal terms and pricing. Some risks could see reducations as much as 10 to 15 percentage point in risk transfer costs.

However, just because the news is good, don’t stop positioning your organization for an improving risk profile with a better safety and wellness culture.

Does that mean we’re still in a soft market?

The market has been a buyer’s market, or soft market, for the past 10 years, with just a few spikes along the way. Last year was fairly flat. This year is going to be softer with more decreases, in general.

Small ups and downs are the new normal. There is a school of thought that hard and soft markets of any magnitude are over. Instead, it will be pockets of hard and soft markets, depending upon the exposure and how much capital is chasing that exposure.

Insurance companies have gotten smarter at how they price. This creates a more efficient market, which might only be disrupted by a huge upheaval like the Affordable Care Act on medical insurance.

An efficient market won’t help you bend your cost trend over the next five years. Instead, you’ll need to change how you buy, and how you think about risk.

How have insurance companies helped create a more efficient market?

Over the past decade, most insurance companies have become more reliant and invested in using analytics on the property side. They’ve tried to improve their models to predict — based on historical losses, construction, weather patterns, etc. — what they think is going to happen and how they should structure their quotes. That trend has expanded to the casualty and cyber side of insurance. Data is being mined more aggressively in all lines of business, and carriers’ reliance is growing monthly.

The disparity also is increasing between insurance companies that rely on predictive modeling and big data analytics tools, and those that underwrite the traditional way. In the next two to five years, this could really affect the market, especially if insurers that aggressively use predictive modeling tools begin to see a return on their investment.

Imagine that insurance company X invests millions into putting its historical information through algorithms. Then, it applies this data to a specific risk, and based on its confidence in the science, the insurer slashes the price, doubles the coverage and guarantees the rate for five years. By putting boundaries around its underwriting process, through predictive modeling, in theory the insurer can make better bets, streamline decision-making and operate with a lean staff.

It’s too soon to tell how much modeling is impacting profitability — the tools are not yet fully validated. The impact may be immense … or it could be the next Y2K. Time will tell.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.