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Managing Your Total Cost of Risk - July 2017
As a manufacturer, how do you quantify your true cost of
risk? For example, if you are faced with a 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
identified, 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 program. We take a total cost of risk approach to
positively affect your price by protecting the following four main asset
The structure of your risk management program looks to help
decrease your total cost of risk. To reach that goal, we help you:
control measures to those exposures
risk transfer or financing options
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
into both offer the foundation for developing forward-thinking approaches to
What is your viewpoint on risk? Is your company risk-averse?
Is it in a financial position to take on more risk versus transferring that
risk to another party or contractually to a carrier? 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 organization. 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 analyze those losses to identify:
incurred costs per loss
- Top loss
with high frequency issues
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 directs us to focus our resources on
delivering the best control measures. An
estimated 75 percent of commercial insurance expenses are claims-driven. We
look to control and reduce this percentage through pre- and post-loss control
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. CMR
Risk & Insurance Services, Inc. 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 program 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.
Interview the staff to learn about their services and tour their facilities.
Invite the physicians 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
Fraudulent claim behavior 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 program and post-loss procedures are
elemental to cost containment. Our agency 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 CMR Risk & Insurance Services, Inc. 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 program 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 percent 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?
We have the resource for you to develop a comprehensive
business continuity plan. This involves backing up your policies and
procedures. Through, we offer 24/7 Web access to your critical risk management
information, employee education resources and tools to drive down your cost of
regulatory compliance; all are ID- and password-enabled for your protection.
Cost of Risk Resources
To develop the most appropriate risk management program for
your organization, CMR Risk & Insurance Services, Inc. approaches
“insurance” through a variety of insurance and non-insurance strategies, such
processes (qualitative and quantitative);
analysis tools to uncover exposures;
of pre- or post-loss initiatives that address cost containment;
continuation planning/disaster recovery;
financing options, retained losses or transferred; and
We work with you to develop a strategic action plan, assist
in the execution of the designed risk management program, and are committed to
the monitoring and support of these initiatives. If you are interested in
reviewing your risk management strategies, contact us today at (619) 297-3160
to speak with one of our insurance experts.