How to effectively use risk management in your organization

Michael J. Lucas, CIC, CRM, partner, Millennium Corporate Solutions

Risk is present in every phase of business, but is not always self-evident. The creation, effective implementation and maintenance of a risk management program can significantly reduce and in some cases eliminate the possibility of a claim against a company, says Michael J. Lucas, CIC, CRM, a partner with Millennium Corporate Solutions.

“Risk management is important to protect the company’s assets from lawsuits and claims,” Lucas says. “Taking a systematic approach to a risk management program will make the process go more smoothly.”

Smart Business spoke with Lucas about how to make the risk management process more effective in your organization.

What are the steps in the process?

The risk management process can be expressed in five general steps: risk identification, risk analysis and prioritization, risk control and loss prevention, risk financing, and risk implementation/administration. Many companies focus on one or two of these and fail to effectively use all of the steps in considering operational, strategic and financial risks that can impact the company at many levels.

Are there keys to effective risk management?

Some of the keys include identifying the company’s hazards/exposures, incorporating all levels of the organization into the process, and elevating the importance of risk management companywide.

There are six general classes of risk that an organization must consider when developing and implementing its own risk management program: economic, legal, political, social, physical and juridical risks. Within these general classes, risks can come from many sources. To make matters worse, risks are changing faster than companies can keep up with ways to manage them.

There are several tactics that risk management professionals can use to help companies stay ahead of the curve. Identifying the company’s corporate culture is a good start. Next, it is very important to establish the company’s risk appetite and tolerance level. This helps determine just how much risk an organization is comfortable allowing. Risk management projects such as installing risk control programs, advanced engineering techniques, and increasing or decreasing deductibles should be strongly considered if the potential benefits outweigh the projects’ costs on a short-term and/or long-term basis.

How does corporate culture affect risk management?

Some corporations are willing to retain more risk than others. Through a risk analysis and by identifying the corporate culture, you can identify whether a specific exposure coincides with the culture relative to the organization’s tolerable risk levels. For example, if a company’s corporate culture is to have high retention on its programs, as far as deductibles are concerned, then it is going to be more comfortable taking on risk because it has controls in place. The company will put more emphasis on and funding into risk management and will elevate its importance in an effort to coincide with its corporate culture and ultimately control its exposures.

How the temporary staffing industry affects the economy

Sally J. Nienhauser, Senior Vice President, Millennium Corporate Solutions

After losing 1.14 million jobs — 37 percent of its work force — between 2007 and 2009, the U.S. temporary staffing industry began to grow again. This turning point, which some might think to be specific to the staffing industry, may be indicative of a greater turnaround in the economy as a whole, if history is to be believed.

“As we pull out of the recession, companies should keep an eye on the temporary personnel industry because it can be used as an early indicator of a turnaround, to some degree,” says Sally J. Nienhauser, a senior vice president and partner with Millennium Corporate Solutions. “While it may be too early to say that the temporary personnel industry data supports a turnaround in the economy, it certainly is one indicator and a precursor to increased overall employment.”

Smart Business talked more with Nienhauser about how temporary staffing affects the economy, and what it means for all employers.

How are temporary personnel providers handling the economy?

The temporary personnel providers are part of the broader ‘contingent work force.’ This contingent work force includes not just temporary personnel but also contract labor, independent contractors and other forms of alternative work force solutions.

Temporary staffing firms lost 37 percent of their work force during the years 2007 to 2009.

So it really is no exaggeration to claim that the recession devastated the temporary personnel industry. However, the temporary personnel industry historically is one of the first employment sectors to show significant growth when the economy begins to show signs of recovery.

The Bureau of Labor Statistics reported in July 2010 that U.S. staffing companies have added more new jobs than any other sector since the recovery began. The American Staffing Association index for January 2011 was up 13 percent over January 2010. In fact, during the second half of 2010, my clients in the temporary staffing sector showed an average payroll growth of 20 percent. Some of my clients’ payroll growth climbed as high as 30 percent.

Why are many businesses turning to temporary staffing for their hiring needs?

With the recession and the attendant downsizing at most firms, businesses are especially reticent to re-staff to 2006 levels. They are rightfully cautious, and do not want to add staff only to have to make cuts again in the event of another economic dip.

Most businesses are looking for flexibility to help them ride out any future bumps in the economy. Therefore, many employers are finding that they may use a temporary staffing company to fill open positions. In some occasions, companies may even audition potential full-time employees by leaving them on the temporary services payroll until they are certain that the employee can meet the demands of the position.

Employers enjoy the flexibility temporary workers provide in times of economic uncertainty. Of course, companies have always used temporary staffing firms or the contingent work force to staff for busy times of the year or special projects.

During the recession, many companies were forced to downsize employees at many different levels, and they are finding that as they begin to grow once again, they may need to fill top management spots. In some instances, these companies are filling some top management positions with employees from temporary staffing firms. Again, flexibility is a key for most companies in overcoming the recession.

What advantages are there to using temporary personnel?

The advantages can be significant — flexibility being the most important advantage. If a temporary employee is unable to fulfill all the duties of the position, the employer has no obligation to continue to employ that individual in the position.

In addition, there are significantly fewer administrative burdens, as the temporary employee service is the employer of record, and as such they are responsible for all state and federal employment taxes and workers’ compensation for the temporary employees. Overall, companies are seeing the value of a more blended work force with traditional employees and contingent employees giving companies more controlled costs.

Will an increase in the hiring of temporary employees lead to more employees being hired on a full-time basis?

I believe that it will, because cautious employers are using temporary services to ‘try out’ employees before hiring them on a full-time basis. As the economy improves, and the temporary employee proves to be a valuable resource, many employers will take them on as full-time employees.

What does this turnaround mean for other employers, and the greater economy?

In past recessions, the turnaround in the temporary employment business has consistently signaled a turnaround in the overall economy. Even though there are still significant issues affecting recovery, including housing, consumer spending and state and local government deficits, the temporary employment business has always been a precursor to recovery. I believe it’s an important indicator of a pending turnaround in the overall economy, and therefore a sign of optimism for employers.

Sally J. Nienhauser, ARM, is a senior vice president and partner with Millennium Corporate Solutions. Reach her at (949) 679-7107 or [email protected]

How to plan for changing insurance costs

Sergio D. Bechara, chairman and founder, Millennium Corporate Solutions

Sergio D. Bechara, chairman and founder, Millennium Corporate Solutions

Most business owners know that the key to keeping business costs down — including insurance costs — is to look ahead.

Sergio D. Bechara, chairman and founder of Millennium Corporate Solutions says there are several factors keeping rates somewhat flat for now, but further increases are on the horizon. Companies should begin planning now to keep the rising costs to a minimum.

“A bend in the road is not the end of the road unless you fail to make the turn,” Bechara says. “It’s not all doom and gloom, just different variables we will have to navigate through, which in years past were non-issues.”

Smart Business spoke with Bechara about what businesses can expect in the future, and how these changes will affect their insurance costs.

What factors are keeping rates flat for now?

One is the reserves insurance companies have built up. Many carriers are using those reserves as capital to redeploy into any number of investment vehicles. But for the most part the carriers use it to buy more market share. The carriers are using capital to not necessarily acquire other carriers but different accounts, and they’re doing it with lower premiums.

Sometimes the rates are lower today than they were three or four years ago, and the risk has not improved. In some cases, the risk might even have deteriorated.

We’re hitting a point where a lot of the capital that is eroding is now going to translate to a rise of rates. The upward trend probably will start in 2012 or the last quarter of 2011. It probably will not be a volatile trend, but it will start trending up.

In essence, this will happen because insurance companies are now reserving appropriately. So if they bought business by low-balling prices in 2009, they will have to apply reserves on the claims for 2009 that are appropriate to that particular year.

Another factor that contributed to softening rates was price competition. When AIG was a damaged brand, its only way to compete was to slash its rates. That had an artificial effect of lowering rates because, to keep their market share and to compete, other carriers had to meet AIG pricing. Today, that is less an issue than it was in 2008.

What are some steps companies should take to prepare for these changes?

One is preparedness from a budgetary or pricing standpoint. If insurance costs are large enough from a budgetary perspective, companies need to know where the pricing trend is going. Then, they can adjust their burden lines appropriately so they don’t accept today’s reality as continuing in perpetuity.

Second, the insurance community fosters a financial partnership between a carrier and the insured. It is very similar to the partnership between a lender and the entity seeking a loan. The one that can best prove they are not going to need the insurance will pay the lowest premium. Just like the ones that can best prove they don’t need the money have the highest likelihood of getting a bigger line of credit or a lesser rate on money borrowed from the bank.

In past years, watching claims has not been as important as it will be in the coming years. Now, there is a malaise about claims. It’s not resulting in higher premiums, so no one is paying attention. When we turn the corner, carriers will point to claims experience as a means of pricing future premiums. Then it becomes important. Between 2012 and 2015, there will be a lot of talk about what’s going on with claims. Focusing on claims now is essentially making sure we gussy up the report card before it becomes relevant.

What can companies do to ensure they determine the right course of action?

Take a proactive approach. That could mean developing a rapport with different carriers or brokers, beginning to negotiate multi-year contracts with insurance markets, or negotiating contracts contingent-based on loss ratios.

Looking forward, it is hyper-critical to manage the claims. Don’t just hand them over to the carrier with the hope that all goes well. Nobody is going to care more about your claims than you do.

The concept of risk management is that the steps you initiate today are benefits you realize about a year or so from now, sometimes even longer. This is one of those areas that will be more important with carriers switching to underwriting for profitability rather than market share. When they make that switch, then you need to demonstrate to a carrier how you will be a profitable account for them.

What other issues will affect future pricing?

Like many other states, California is in a position of financial weakness.

The Division of Occupational Safety and Health (Cal/OSHA) will have a more pronounced presence in the business community than it does now. OSHA compliance is going to be an important factor, not just for insurance costs but costs in general.

A soon-to-be-popular question is ‘Where does it stand with OSHA?’

Companies should prepare for that by establishing sound policies and procedures for OSHA compliance. Build the ark before it rains. It’s important to do that now, because there are going to be more visits from compliance officers than there were in the past, because OSHA is under edict to become a self-funded part of the state government.

Businesses should also pay attention to AB 2774, which became law in California on Jan. 1, 2011. It’s one of the most important pieces of occupational safety and health legislation since Cal/OSHA came into existence. It provides the Division of Occupational Safety and Health with a series of steps that must be completed to establish a serious violation. And if the steps are followed, employers will face major fines that are more likely to stick — and stick without reduction.

Sergio D. Bechara is chairman and founder of Millennium Corporate Solutions. Reach him at (949) 857-4500 or [email protected]