Risk management was once regarded as an insurance purchasing function for the risk manager, or even for local plant managers, with no connection to the company’s broader operational or financial priorities.
But with the economic downturn, more CEOs and CFOs are re-evaluating their purchasing habits for all facets of the operations, including insurance premiums. Further, with the number of natural disasters in the past few years, protecting the company’s assets and revenue stream has been front of mind for CEOs and CFOs, and risk management has become a key part of the overall financial and operational strategy, says Rebecca Newman, Director of Aon Mergers & Acquisitions, a part of Aon Risk Services.
“All too often, we run into companies not taking this approach and leaving room for improvement, both in terms of coverage and premium savings,” says Newman. “By purchasing insurance on a consolidated basis, broader coverage terms can be negotiated and often, premium savings can be achieved. But most important, this consolidated approach to purchasing insurance forces the company to develop a risk management philosophy after thoughtfully considering its appetite for risk.”
Smart Business spoke with Newman about how to develop a corporate risk management program and the benefits that come with it.
At what point should a company take a risk management approach?
Most large companies follow this strategy already. We most often see a decentralized approach to risk management when companies have grown substantially — either organically or by acquisition — and lose track of insurance along the way, or in very lean organizations, where CFOs are hesitant to include another item on their long list of responsibilities. Every company should be evaluating its risks from the top, identifying all the noninsurable and insurable risks. Many mid-sized and small companies purchase insurance based on statutory, lender or contractual requirements, and fail to think beyond the mandates until they suffer a loss. It is these companies that have the most to gain from this approach.
What lines of coverage can be consolidated?
All lines of coverage, including workers’ compensation, automobile, general liability and property can be consolidated. Repeatedly, we have seen companies purchasing different policies for each location, state or subsidiary, but when the risk profile is aggregated across the entire corporation, premium savings up to 40 percent can be achieved. Consolidating the exposure information (i.e. payroll, sales, autos and property values) usually gains negotiating leverage in the insurance marketplace.
Besides premium savings, what are some other benefits of consolidation?
Specific to property insurance, depending on the spread of risk, the coverage terms can be enhanced substantially regarding certain sublimits, blanket versus scheduled coverage, flood/earthquake catastrophe limits and coinsurance penalties. For those that may not have suffered a property loss yet, this may not seem important, but it can make a significant difference in the amount the insurance company pays for a loss, or even if it pays at all.
Administrative efficiency is another benefit to centralizing insurance procurement, as having a single renewal date and one point person handling the renewal saves time.
The ability to easily track and manage your company’s total cost of risk (TCOR includes premiums, claims and expenses) is another benefit. TCOR is most often converted to a percentage of an operating value, such as revenue, allowing you to normalize the data for benchmarking year to year, and can also be used to benchmark business units. Claims safety and loss control best practices can be implemented throughout the company to reduce losses.
How does risk management work if a company has operations outside the United States?
Today, many companies have a global reach in terms of sales, operations or supply chains. Hence, the need is enhanced for corporate wide oversight of insurance and an insurance broker with global capabilities.
Some countries require that local policies be issued within their own jurisdiction, and a global broker will understand these laws. By understanding the full scope of exposures worldwide, you can cover them on a single global insurance program, with local policies where required. An umbrella policy can then provide coverage excess of the global program, creating true worldwide coverage.
Companies commonly allow their country manager to purchase insurance from a local agent in the name of the local subsidiary, with no link to the main operating entity or U.S. holding company. This leaves a major gap in coverage should the foreign subsidiary be sued in the U.S., or the U.S. operating entity be faced with a suit filed in that country.
What is the impact if a company plans to grow through acquisitions or be sold?
Both strategies create even more reason to create a platform risk management program. On the sell side, delivering a consolidated program for all company operations will create an easy-to-understand package for the buyer to evaluate. In addition, the premium savings achieved may increase EBITDA, the metric often used in determining the purchase price.
On the buy side, having a corporate wide program lends itself nicely to realizing synergies immediately upon closing the transaction. This ensures that the newly acquired assets are insured following the corporate risk management philosophy and creates a prime opportunity for a new risk management philosophy to be adopted.
As a company realigns resources, a corporate wide risk management platform can be an effective way to protect the balance sheet and create value across the entire entity.
Rebecca Newman is director of Aon Mergers & Acquisitions, a part of Aon Risk Services. Reach her at (314) 854-0766 or Rebecca.Newman@aon.com.