Managing Your Total Cost of Risk

As a manufacturer, how do you quantify your true cost of risk? For example, if you are faced with a product recall, how do you calculate your loss of reputation or market share?

It is difficult, at best, to quantify this scenario. In contrast, other components of your cost of risk are easily identifiable, such as insurance premiums, or lost production costs caused by downtime of a custom piece of machinery.

Total cost of risk is an insurance term describing the cost of both pure and speculative risk. It is synonymous with price—the price of your risk management programme. We take a total cost of risk approach to positively affect your price by protecting the following four main asset categories:

Organisation
Personnel
Property
Net income

The structure of your risk management programme looks to help decrease your total cost of risk. To reach that goal, we help you do the following:

Analyse your exposures
Implement control measures to those exposures
Determine risk transfer or financing options
Manage current and future exposures

Identification of Exposures

As part of our risk management interview process, we look to confirm that your risk management approach supports your overall business objectives and plans for your company’s future. How would your income or cash flow be affected if there were unforeseen depletions of capital or a shutdown in the plant?

Discussing the qualitative aspects of your business provides the important details needed to solidify a plan to help your business succeed, even if the worst happened. Risks can be both qualitative and quantitative. Analyses of both offer the foundation for developing forward-thinking approaches to those exposures.

What is your viewpoint on risk? Is your company risk-averse? Is it in a financial position to take on more risk rather than transferring that risk to another party or contractually to an insurer?

To help determine your risk aversion, it helps to assess your company history. For example, if you are a start-up company, cash flow and funds are typically tight, so you are more likely to be adverse to risk to protect the financial viability of your start-up organisation. Conversely, if your company has a 20-plus year history, there are also risks, including becoming obsolete, stagnant or too conservative with your business plan.

Additionally, we consider norms in the manufacturing industry, your market position and competition to position your risk management solution to the changing needs of your business.

Quantitative analysis supports the qualitative interview. We look at the ‘hard numbers’ and prior losses to identify trends in your performance. We also analyse those losses to identify:

Average incurred costs per loss
Total incurred trends
Top loss drivers
Locations with high-frequency issues
Fraud behaviours
Reporting lag time
Frequency vs. severity ratios

The results of our in-depth analysis will reveal opportunities to approach the critical areas driving your total cost of risk. We will isolate the root causes of these problematic areas and look to implement control measures to mitigate this exposure.

Implementation of Control Measures

Identifying exposures helps us focus our resources on delivering the best control measures. An estimated 75 per cent of commercial insurance expenses are claims-driven. We look to control and reduce this percentage through pre- and post-loss control measures.

A comprehensive loss control evaluation uncovers your strengths and weaknesses. A company may have strong management leadership behind his or her initiatives but have no employee buy-in or participation. Abbey Bond Lovis Ltd has the solutions to establish a safety committee, delivering a comprehensive employee safety education campaign to address your exposures.

There are many post-loss or cost containment strategies. A proactive and effective Return to Work programme is one strategy that positively affects your bottom line: offering a bank of modified duty jobs for employees and informing the doctor there is modified work available. Also, establishing a relationship with a local occupational medicine clinic can help manage costs if you offer private health care. Interview the staff to learn about their services and tour their facilities. Invite the doctors into your business to get a first-hand look and understanding of your operations. By providing them with the details of your operations, they can accurately evaluate reported injuries to confirm if they are work-related.

Fraudulent behaviour can drive the cost of risk out of control. Anti-fraud tactics include educating employees on the effects of insurance fraud through payroll stuffers and worksite posters, and offering safety incentives for solid performance. Also, keeping a motor vehicle accident kit in company vehicles, along with a disposable camera, allows you to document evidence, providing stronger subrogation results.

An active loss control programme and post-loss procedures are elemental to cost containment. Our broker age offers comprehensive resources to employ the most appropriate strategies for your business.

Risk Transfer and Financing

Once we have identified exposures and created control measures, we can focus on the remaining exposures to transfer and/or finance. You will want to address questions such as: How much risk can I afford to assume in-house? How can Abbey Bond Lovis Ltd assist in contractually transferring risk to a third party? Lastly, what portion of the exposures do I want to finance through an insurance policy?

Addressing these questions offers a direction as to how to approach the financing of your risk. Think about current cash flow needs. Are account receivables current? If there is a lag, how long is it, and are there resources to correct it?

Considerations involve self-insured retentions if you have a mature loss control programme and the financial reserves to cover shock losses that occur. Therefore, a combination of insurance and non-insurance strategies should be considered.

Manage Your Exposures

Roughly 25 per cent of businesses that sustain a major catastrophe are no longer in business within a year’s time. If there is an interruption in your operations, are you prepared?

Cost of Risk Resources

To develop the most appropriate risk management programme for your organisation, ABL Group approaches ‘insurance’ through a variety of insurance and non-insurance strategies, such as:

Identification processes (qualitative and quantitative)
Loss analysis tools to uncover exposures
Implementation of pre- or post-loss initiatives that address cost containment
Business continuation planning/disaster recovery
Risk financing options, retained losses or transferred
Regulatory compliance issues

We can work with you to develop a strategic action plan, assist in the execution of the designed risk management programme, and are committed to the monitoring and support of these initiatives. If you are interested in reviewing your risk management strategies, contact our risk management team in Belfast today to speak with one of our insurance experts.