Reducing the cost of risk Featured

8:00pm EDT May 26, 2007

Most CEOs purchase insurance coverage believing that it will protect their business from risk. The reality is that buying insurance merely transfers the potential for economic loss to an insurance carrier. To truly reduce the possibility of financial loss, the core culture must include an effective risk management program.

Over the past 60 years, risk management has become a sophisticated discipline. Today’s best-in-class risk management programs help keep workers safe and on the job, and define accountabilities for results and ways to measure them.

“The total cost of risk (TCOR) includes, but is not limited to, insurance premiums, retained losses, the indirect cost of losses, outside services and risk management administration costs,” says William A. (Bill) Werber, a Certified Risk Manager (CRM) with Westland Insurance Brokers. “The indirect costs of a loss, such as training time, overtime, lost productivity, opportunity costs, lost customers and management time dealing with claims, increase the direct loss by two to five times, and that directly impacts after-tax profit. Truly controlling the cost means stopping the losses from occurring and aggressively managing those losses that do occur.”

Smart Business spoke with Werber about how CEOs can design and implement an effective risk management program.

What defines the risk management process?

Risk management is the practice of protecting an organization from financial damage by identifying, analyzing and controlling risk at the lowest possible long-term cost. The phases of the risk management process contemplate the identification of risk, then analyze and quantify the exposures based on the potential for economic loss. Then select effective risk management techniques for controlling and financing the risks, implement the selected techniques and continuously monitor the results.

The process itself has value because it causes managers to be focused on the continuing dynamic process. Insurance premiums will go up and down as part of the cyclical nature of the insurance business, which is naturally tied to the stock market. Workers’ compensation costs are directly tied to your experience, so regardless of what happens with rates, you can exercise greater control over your costs by reducing your losses and subsequently your experience modification factor.

What constitutes an effective risk management program?

Many components individually may produce some results, but the synergistic combination of the important elements of a best-in-class risk management program will produce dramatic results.

  • Establish a corporate culture that highlights safety accountability as a core value and a way of doing business. It is unacceptable to get hurt on the job or crash a company vehicle.

  • Initiate a well-defined process around incident and injury reporting that places clear accountabilities for managers and employees alike and includes the necessary protocols and forms.

  • Establish and communicate an effective ‘return-to-same’ work policy coordinated with medical treatment and work restrictions.

  • Train supervisors and employees in incident and injury prevention and what to do when they happen. Injured employees often seek attorneys because they don’t know what to expect.

  • Develop and implement an incentive program that rewards supervisors and employees for working safely. Carefully done well it will produce excellent results.

What risk management factors should be tracked and monitored?

CEOs should develop a ‘vital signs report’ of key risk management indicators. Measure your results — what gets measured gets managed. Monthly track your data and weekly manage your claims-loss ratios, loss frequency and severity, employees with multiple injuries and, most importantly, the status and strategy to get an employee back to work and well.

In the experience modification calculation and also in real life, claim frequency will breed severity. It is important to focus on the small claims and near misses to prevent the large ones.

Finally, hold everyone accountable.

How much money will a quantified risk management program save?

Two janitorial clients in a tough risk management business have reduced their workers’ compensation costs by 50 percent to 60 percent. Another client in the vending industry embraced effective components of a risk management program, improved its excellent core culture, and the result has saved hundreds of thousands of dollars.

In the long run, CEOs will see dramatic financial benefits from embracing an immediate and long-term risk management culture.

WILLIAM A. WERBER is a Certified Risk Manager (CRM) with Westland Insurance Brokers. Reach him at (619) 584-6400 ext. 3254 or For more information, visit