Alternative Title: 'YOU DON'T KNOW WHERE YOU'RE GOING, UNTIL YOU KNOW WHERE YOU'RE AT'
OSHA, WHMIS, CERCLA, ERISA? What do they all mean? If you are involved in the protection of your company and its assets, you need to know what these and other acronyms stand for.
D&O, E&O, CGL, ACV, RCV, and so it goes! Each industry has its own specific jargon, and the insurance industry has contrived to make its own terminology as difficult to understand as any. Consumers navigating through the maze of policy wordings, products, and suppliers are often so daunted that they give up and rely on their suppliers to make decisions for them.
Most suppliers and intermediaries act with the highest integrity toward their clients, the source of their income. However, it is only natural to think in terms of one's own best outcome, and a supplier of a product will always offer the best solution available from its own resources before considering alternatives. So anyone who has the responsibility of protecting a corporation's assets needs to understand basic steps to take in structuring a program that provides comprehensive protection at a reasonable cost.
Although a risk management review is most timely before an insurance renewal, it can be undertaken at any time. In fact, it's wisest to look at the insurance program only after the risk management review is complete.
A common misconception is that the purchase of insurance achieves the goals of risk management. But insurance does not affect risk; it only affects the effects that arise from the risk. A useful question to ask is this: If I did not have any insurance at all, what would I do differently? If this question is applied systematically to every aspect of a corporation's operations, the initial evaluation will serve a very useful purpose: You will know which risks can be endured and which risks will shut down your corporation.
If we say that risks you can easily assume are rated 0 and those you cannot assume are a 10 (and must therefore be insured), then those that you have rated 1 through 9 need to be carefully considered for their impact.
Exhibit 1 will give a clearer perspective on this issue. If the chance of a risk is a 10 (that is, if it would destroy the business), the risk would have to be insured or the operation could not logically continue. If the chance of a risk was a 3 and the impact was only 2, the options will change and risk management can be implemented to minimize both the chance of a loss and its impact if it occurs.
The further above 5 the point of risk falls, the greater will be its potential effect on corporate assets-and the greater the need for a risk-transfer vehicle, such as an insurance policy. The further below '5' the risk falls, the more viable it becomes to assume that risk. Loss-prevention techniques are appropriate anywhere in the exposure analysis, as long as cost and effectiveness are kept in perspective.
Loss prevention must be the only consideration where injury or death, either to employees or the public, are concerned. No amount of cost cutting or saving can justify even a remote chance of injury or death. As Workers' Compensation and lawyers' litigation files will show, these events happen even when good loss-prevention practices are in use. However, loss prevention for the sake of creating the perfect risk-or 'pig-iron under water' in the old-time Fire underwriter's parlance-also has to be avoided.
The evaluation of risk is not something to leave to a supplier, since missed exposures will always be possible, particularly if the supplier does not have a product to fit a certain area of risk. If the corporation does not possess the necessary expertise, seek the services of a risk management consultant.
Let's define the function of a risk management consultant. Many insurance consultants are available whose primary function is to monitor existing insurance programs, analyze policy wordings and liaise with the selected insurance broker; this should not be the primary role of a risk management consultant. A risk management consultant must operate as an extension of his or her client in the identification and evaluation of factors that could imperil the integrity and profitable operation of the client company. The consultant should then propose appropriate solutions to those factors, and implement and monitor the agreed procedures.
A risk management analysis will consider all aspects of the operation including: cash management; 'just-in-time' inventory management; availability of alternate suppliers; key customers; key facilities, equipment, and people; computer dependence; valuable papers, designs, and intellectual property; quality control; loss prevention to real and personal property; transit exposures; foreign contract evaluation; internal and external crime audit; product liability; hiring and firing practices; safety committee review; employee and public safety; automobile and fleet safety; directors, officers and fiduciary responsibilities; product tampering; extortion; kidnap and ransom; credit risk, claims and self-insurance monitoring; claim funding alternatives; environmental hazards; effects of marketing cycles; and effects of new legislation. This list can be expanded to reflect the client's own concerns and to include newly identified risks.
These topics could form the core of a typical risk management analysis. It should be evident that a supplier will be unable to deliver an integrated, comprehensive review, and that insurance consultants will be too narrowly focused.
After considering identified exposures and agreeing on the best methods to address them, review existing and future insurance needs. The industry delivery system was created 100 years ago, and the selling of products has changed little since then. There's some justification for this lack of innovation. The legal system, which will always have the last word on a policy's intent and performance, has specific interpretations from which insurers deviate at their peril. A knowledgeable in-house professional or risk-management consultant should be on hand to interpret the fine print.
One type of risk that's often overlooked is the risk to a corporation's reputation. Whenever an intermediary is engaged to represent a company, it is essential that any material affecting the company's image or reputation be approved for release by a senior member or officer. I have seen marketing submissions ranging from slick, glossy, full-color, bound presentations (which sometimes say nothing or are full of mistakes) to one-page handwritten sheets (which sometimes say a lot).
Insist on being represented in the marketplace as professionally as you feel is appropriate. If your current intermediary can't or won't conform to your objectives, it may be time for a change. Sloppy submissions create a negative attitude in the recipient and can affect the cost and scope of service or product. If you have never seen a proposal made on your behalf by an intermediary, ask to see some of their past presentations.
Let us now turn to insurance renewals. Policy renewal negotiations should be started no less than four months before an expiration. The first month can be used to collect data and then prepare and approve the submission; the second and third months to discuss and negotiate with underwriters (and conduct background work, such as loss-prevention surveys); and the fourth month to make the presentation to the client, allowing for review and the decision.
During this process, insist on communication; there should be no unpleasant surprises! If you are receiving negative feedback from the marketplace, especially incumbent insurers, ask to meet with them. If your intermediary can't or won't arrange a meeting, look closely at the client/intermediary/insurer relationship to determine the need for any change.
Always agree with the intermediary representing your company on what is expected and what can be realistically delivered. Insist on follow-through. Whenever possible, arrange renewals together, or at least group coverage into property/asset protection and liability/casualty. Use these combinations, or your whole portfolio, to maximize leverage in your favor. Always consider the value of long-term relationships before terminating a carrier.
Consider the carrier's attitude to claims in the past and whether you were treated fairly. If you had favorable experiences, it may be worth paying a bit more to maintain the relationship. Always remember that the provision of a risk management program should be viewed as a cooperative venture between the in-house buyer-counseled when needed by a true risk management professional, the client's chosen intermediary-and the insurer.
Companies that were around during the products liability crisis in the mid 1970s or the capacity squeeze of the mid '80s experienced firsthand the effects of market cycles, probably with bitter memories. Currently, the insurance market is in an overcapacity stage, and the availability of coverage and capacity has produced a strong buyers' market.
Predictions on how long this situation will continue range from 'It's going to get harder tomorrow' to 'This could last forever.' Personally, I believe that the marketplace has become so segmented that adverse results in one sector no longer affect another. For example, the aviation market, after many serious claims, reacted to its loss ratio with a dramatic upward rate swing in early 1991. In the future, we will see this type of reaction in other product lines.
There can be an enormous temptation to buy everything available when rates are low, products proliferate, and limits are high. Stop and ask yourself whether you really need them. Explaining to the board of directors or management committee that you have purchased an incredibly broad insurance program at bargain- basement prices is fine-until the market contracts and you must either increase costs dramatically to maintain the coverages or make them unavailable.
I am often asked whether direct writers are a viable alternative to traditional insurers who provide their products through an intermediary (insurance broker). The answer is yes and no. Before approaching any supplier, whether direct writer or broker, consider your needs. I believe that a client who has limited product knowledge needs an insurance broker or risk-management professional to interpret coverage and terminology and gauge the value of the service or cost combination.
The problem with committing to a direct writer insurer is that the element of marketplace competition is removed and you will be restricted solely to the products of that insurer. However, direct writers often offer unique or specialized services called for by the complexity of risk-for example, loss-prevention services. It is doubtful whether any meaningful savings can be gained from eliminating the broker intermediary, since the direct writer has to pay its own sales, marketing, and account executive force. The key here, as in any transaction, is to become an informed consumer, or to engage the services of someone who is.
In conclusion, remember that 'You don't know where you're going until you know where you're at.' To make informed decisions, you must have accurate data available detailing your own unique company history, as well as the relevant history of your industry to use as a benchmark. If you do not yet have this available, now is the perfect time to create a loss-tracking system to provide this essential database. Ask your broker and insurer to help create this database. There are reasons, and systems available, for generating this information. Always stay informed, and the benefits will exceed your wildest predictions.