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Claims Management: An Important Part Of A Successful Insurance Program
CLAIMS MANAGEMENT: AN IMPORTANT PART OF A SUCCESSFUL INSURANCE PROGRAM by Elizabeth Shaw, CPCU This writing is based on one simple premise: The integration of claims management into a commercial insurance product during the early stages will improve the results of the insurance program. Just as a marketing plan defines the distribution process and an underwriting plan defines the risk selection and rating processes, a claims management plan to define the response process is the logical third piece, and is just as important to the success of the insurance program. To begin the discussion, let's interpret the insurance product from the perspective of an insured or affinity group of insureds. The insurance product is: a coverage contract providing protection from the financial results of accidental loss service and advice from an agent/broker and the carrier, at times critical to the insured Next let's analyze what an insured or a group of insureds expects from an insurance program. They expect: the coverage they need as defined by the law and/or the group or organization's risk philosophy, at a price that they believe is fair and in line with the organization's financial goals the service they want for maintaining the coverage they need. This service might include having all their questions answered, getting proactive advice as business conditions or market opportunities change, and getting professional assistance leading to prompt resolution when claims occur Traditionally, all parties involved with providing insurance have recognized the significant impact of claims considerations only after losses have occurred. The importance of proper reserving for the rating process and timely, accurate reports on actual losses for strategic decision-making and loss-control activities is undeniable. More directly, the claims process delivers the promises called for in the insurance contract, and therefore plays an integral part in the program. But what about before the fact? To be most effective, claims management should be discussed before the losses have occurred and even before the coverage has been decided upon and bound. As the continuing soft market for commercial casualty business attests, the days of the insurance market alone determining the availability of coverages and the rates charged for those coverages are gone, probably never to return. A commercial insured today insists on having more control over its own financial destiny. Accidental losses leading to claims are obviously an important part of that financial destiny. The commercial insured today is more sophisticated and has many more options for exercising control than ever before. Some of the control is achieved by implementing loss-control measures. Other options relate to risk financing, each of which may create important claims ramifications. The risk-financing options now available include: new and/or larger retentions through deductibles, self-insurance, and captive reinsurance increased bargaining power through association sponsorship of insurance programs, purchasing groups and risk retention groups, and specialty niche programs customized for particular affinity groups Most critical for this discussion is another important benefit that insureds are also coming to expect in their insurance programs: understanding how their claims will be handled and having some input into the process so as to address their insurance requirements and support their financial and business goals better. Doesn't it then seem logical to integrate a program or account-specific claims management understanding into the overall insurance program at the outset, rather than assuming that the claims will simply take care of themselves as long as there are adjusters handling them? Line claims people, including those in management positions, do operate under a claims management plan. Every insurance carrier with any kind of claims staff has documented general procedures and standards for its claims department that it uses for dealing with common, and even not so common, claims issues. These procedures and standards are applied across the board for all policies and all insureds, and they are needed for fairness, consistent contract compliance, and ease of internal management. Authority levels for loss reserves and settlements, geographical and organizational work distributions and adjuster caseloads, and philosophies for establishing reserves and providing a defense are among the issues usually addressed by these standards. Unfortunately, because of the carriers' size and organizational concerns and the carrier's own financial interests, these standards are generic and often fairly inflexible, especially when specific claims concerns are not considered during the account or program planning process. Individual account or program issues are not particularly weighed when the procedures are established, and often account and program issues are not considered when the procedures are practiced. Claims veterans are even heard to say that 'a claim is a claim is a claim is a claim.' Insureds, as they become more knowledgeable and more assertive in their efforts to control their financial destiny, are not likely to concur with this characterization, especially when the claim in question is theirs. Furthermore, when claims standards and philosophies are not discussed with insureds until losses have occurred, they are likely to come to light as apparent conflicts. Through market opportunities becoming available to them, insureds are able to participate to some degree in planning the coverage to be provided and the rates to be charged, and the way the coverage will be coordinated with the methods and levels they have chosen for retention and risk financing. Why should they not expect to have some initial understanding of who will handle their claims, how and by whom and within what legal and ethical parameters their claims will be defended, or some input into when and for how much their claims are settled? This is not to advocate that insurance carriers should abandon the claims discipline to their insureds, any more than they similarly abandon the underwriting discipline. However, as proper underwriting criteria for risk selection and rating differ under the circumstances of different programs or accounts, different market conditions, and different carrier appetites, the procedures and standards that dictate claims practices can also differ and still be proper legally and actuarially. For instance, good claims practice dictates that subrogation from a viable third party, once identified, should always be pursued because the policy provides the carrier that right. But what if the viable third party happens to be an important client of the insured and an attempt to recoup a claim expenditure could interfere with the insured's continuing relationship with that client in the long run? Especially when the insured participates in the ultimate financial exposure for the loss, whether to subrogate becomes not only a claim decision but also a business decision. As another example, cost-effective claims philosophy dictates that small claims even if somewhat questionable, usually be settled early at a nominal cost (commonly called nuisance value) to prevent the need for incurring further investigative and defense expenses. But what if the insured believes that such a settlement in a particular case will encourage more claims of the same type and feels that a stronger defense posture in that case, though not individually cost effective, could prevent a proliferation of similar claims? There is no definitive answer to these situations. But an early claims management discussion, inviting input from the insured, can provide additional guidance to the claims adjuster and acceptance from the insured before they act as general procedures dictate. But claims practices that are within the legal and actuarial requirements of the carrier AND that best meet the an individual account's expectations are unlikely to occur by chance. Moreover, the time after the loss or period of losses is clearly not the best time to discover general procedures conflicting with the insured's or group's expectations or needs. Unfortunately, that is when the discovery is most likely to take place. The best time is upfront, while the program is being designed and the deal negotiated. That is when the communication lines are uncluttered by losses that have already occurred and by the potential frustration of unmet expectations. In direct contrast to abandonment of the claims discipline, I recommend taking the time to explain and agree to a claims strategy that takes into account the insured's goals and the carrier's responsibilities. The specific advantages of having a program-focused claims management strategy include: Establishing communication lines to discuss routine and non-routine matters and to encourage a meaningful exchange to anticipate and provide for claims concerns Defining a role in the claims process for the insured or group that adds value to the claims-management process Determining useful measurement tools for the insurance program in relation to claims. Communication is the exchange of ideas and information. Effective communication is essential to a successful relationship and is the first step toward meeting the goals of all parties. Establishing and practicing meaningful, consistent communication procedures should occur from the outset of the relationship to prevent confusion or surprises later on. Exchanges regarding claims during the planning stages can encourage meaningful communication later on about claims matters. The successful use of such lines of communication for nonadversarial problem-solving and general reassurances could be as critical to an insured as premium cost. Part of the communication process is providing information, but the other part is receiving and understanding the information provided, including the attitudes and philosophies it reflects. Claims discussions should take into account the level of satisfaction of the insured's organization, with claim methods and results from the past and the reasons behind those opinions. Claims situations intrinsic to the particular type of business and to certain functions within the organizations should be considered. All concerns relating directly to claims handling should be identified and analyzed. But these claims issues cannot be meaningfully considered if they are not even mentioned during the planning process. If they are simply presumed to be addressed by generic claims practices designed to be consistent and meet the carrier's organizational management system, disappointment or conflict is likely to arise. The key is to establish the relationship in the earliest stages of the insurance program as a means for routine communication, not exchanges that take place only when a problem has developed or has escalated to potentially serious proportions. Meaningful communication requires an ongoing relationship between the parties, which is difficult to establish under the duress of frustration on both sides. Communication leads to smoother claims handling and a more satisfied insured. The second advantage of a claims management understanding is that it can specifically provide a means for the insured's input. The role of the insured or the group in the claims management process should be designed around the goal of advancing the appropriate and effective management of the losses under the program. Some of the obvious activities in that role are delineated in the Conditions sections of a standard insurance policy, such as reporting losses promptly to allow the investigation process to begin within the earliest possible time frame. Although especially important in Workers Compensation claims because of statutory time frames imposed on those responsible for paying benefits to injured employees, prompt reporting is important in every line of coverage. Another activity is to cooperate fully with the investigation efforts, including relaying all the facts as they are known, allowing access to knowledgeable personnel, and encouraging an open interchange of information as claim facts develop. An insured attempting to control the scope of the investigation by withholding pertinent information, regardless of the motivation, could limit the ability of the claims person to structure a competent defense. Claims people make their living investigating, evaluating, and resolving losses and complying with statutory requirements and court procedures. The insured person or group is rightfully concerned with the challenges, opportunities, and limitations for furthering the business purpose of their organization and the impact of claims on that business. Claims people welcome input and cooperation within areas of the insured's expertise. This vital contribution, based upon the insured's area of greatest knowledge and experience, adds value to the process and imparts an insight into the organization or business, the products or services, and the political and philosophical workings within the organization or profession. A subtle balance must be maintained between desirable input and inadvertent interference in the claims-management process. An agreement about the insured's involvement in the claims process, balanced with the available professional claims expertise, best promotes the basic purposes behind the insurance program of real savings in loss costs with long-term strategies (not short-term tactics). The third advantage of a focused claims-management strategy is to establish a set of claims ground rules and expectations against which actual results can be measured. As business and market conditions evolve, measurement tools are essential to enable the insured as well as the insurance professionals to evaluate the current insurance program and make necessary modifications over time. Taking the time during the planning stages to establish claims-measurement tools that are consistent with the goals of the insured and the insurer is well worth the effort. In conclusion, the basic premise of this piece was that integration of claims management in the commercial insurance product will contribute to improved results from the program. The insurance broker or agent achieves program success through binding the insurance program and expanding it over time. The insured or group achieves program success by promoting its own favorable financial results and having its insurance program meet its expectations. The insurer achieves program success through profitable underwriting results and retention of a profitable account. Encouraging discussions to anticipate and provide for claims concerns and establishing communication lines for nonadversarial problem-solving, defining a meaningful role for the insured or group in the claims-management process, and determining effective claims measurement tools, enhance the chances for success in all these areas....

Compensation Approach For Agency Service And Support Personnel
The determination of adequate compensation levels for the staff is one of the most difficult issues faced by agency owners and managers. Compensation is dependent on so many different aspects of the agency operation that it must be individualized for each organization. What some agencies are doing will not necessarily be right for you. You can get advice from other agents, consultants, articles, and The Middleton Letter, but the final approach must accommodate and complement your specific agency's business plan. In another Middleton article, we presented the key to increase productivity and profitability-pay employees based on performance and combine the compensation with non-monetary motivational tools. As the commercial market continues to soften (can this really be happening?) and personal lines commission rates decrease, there will be fewer dollars per account with which to pay employees and meet other operating expenses. It is essential that the amount that is being paid is indeed improving productivity and increasing the number of accounts that each person can effectively handle. In another article, we will tackle producer and owner compensation in this difficult marketplace. In this issue we are focusing on compensating the service, support, and management personnel but many concepts and methods can also be applied to salespeople and particularly to owners who are functioning primarily as managers. What it all boils down to is that everyone must be on a compensation system that fosters creativity. People must be encouraged to find the smartest way to get things done and they should be rewarded for the quality and quantity of performance rather than the number of years that they have been with the agency. Over half of the agencies in this country still do not have a formal compensation plan for non-sales employees. Those that have implemented such a structure are much more successful in tying compensation to performance and in accomplishing the results we talked about last month. Do it NOW. The smaller the agency, the easier it is to put guidelines and salary ranges. Implementation of the plan is a traumatic experience and it is easier when there are fewer employees to absorb the changes. A formal Salary Administration Plan for the non-sales employees will help insure that: everyone will be paid fairly and equitably based upon the value of their position to the agency and the performance of the required functions of that job; each employee knows what has to be done to obtain a promotion and/or an increase in compensation; each employee has the opportunity to advance as far as he/she wants to and is capable of; there is a systematic and fair method of adjusting compensation based on performance. There are five steps involved in implementing a salary administration program: 1. understand the job involved; 2. determine what the job is worth; 3. relate compensation to similar jobs in other agencies; 4. reward individual achievement; 5. establish policies, guidelines, and procedures for administering pay. The starting point in putting together such a plan, then, is to prepare written job descriptions. Have each employee write one. Have each supervisor or manager write one for the positions they manage. And when you have gotten over the shock of the different perceptions of the positions from employees and managers, conduct a complete evaluation combining their input, and classify each job position. Consider the management, administrative, and professional responsibilities of each position and rank them on a scale of one to five for the following categories. Does the job influence these things? Monetary impact-the direct influence that the job has on income and/or expenses and therefore profit; Decision-making responsibility- the level of decisions that can be made without having to go to a higher authority for approval; Complexity of analysis and problem solving-the level of technical analysis and professional knowledge required of the position; Degree of innovation-requirement for developing new ideas or changes in methods, procedures or services; Nature of relationships-contacts that the position has with other people in the agency, management, clients, company personnel and the level of diplomacy and persuasiveness necessary to carry out the job; Educational requirements-the level of education (including professional insurance courses) that should have been attained; Experience requirements-the work experience and insurance industry experience desired and the nature of this experience (company, agency, etc.); Number and nature of positions supervised/managed-people managed and skill level of the subordinate positions. It is extremely important to conduct this evaluation of the positions without regard to the current incumbents of the position, even if that person is doing a good job. What should the job description be? And what type of person should be filling the position? If you are lucky, you will already have the right people in the slots-if not, you know what you will need to be doing in future hiring situations. Once this exercise has been completed, relative job classifications can be assigned and the actual job description can be written that include reporting relationships, overall job purpose, specific responsibilities (usually 8 to 10 basic tasks), and job qualifications. Be sure to include as one of the responsibilities: Other tasks assigned by the (Manager / President); to avoid being confronted by; That's not my job; Everyone needs to know that, while they may have specific routine tasks, any assignment deemed to be necessary by management is to be performed because it is helping the whole organization achieve its goals. Employees have to understand that the accomplishment of the overall objective is the ultimate purpose of every job in the agency. Along with job descriptions and classifications, the employees filling the positions must be given individual direction on what they need to do to get a raise next year or to get a promotion to a higher job class. The performance evaluation should focus on past performance strengths and weaknesses as well as what could be improved. Quantifiable items such as volume of work handled, days absent, should be included and the following qualities graded: accuracy, orderliness, reliability, appearance, job knowledge, written and oral self expression, intelligence, decision-making ability within the parameters of the job definition, resourcefulness, initiative, acceptance of responsibility, and most importantly attitude and team spirit. Having a negative attitude and pulling the rest of the employees down is probably the single most important reason for firing someone . . . no matter how well they perform their job otherwise. Low morale can reduce productivity by as much as 75%. An employee who continually voices a negative attitude cannot be tolerated. Formal performance reviews should be conducted at least once a year. These should include a review of the goals set the previous year, the employee's own assessment of his/her performance and related strengths and weaknesses, and the manager's perception of the results of the review period. The final evaluation should be in written form and signed by the manger and the employee to avoid possible EEOC problems should it become necessary to terminate the employment of the person. You need proof that they have adequate notice that their performance needed to be improved. The performance review will take care of some of the feedback that is necessary to meet the needs of the employees. Paying attention to the members of the team is also important on a daily basis. Don't assume that having a performance evaluation plan is a substitute for the positive stroking and the gentle remonstrances that are an integral part of personnel management. One of the most common complaints that we hear in agencies is that people never know what management is thinking unless they've done something wrong and the screaming starts. Why don't they let me know when I've done something right? Salary ranges for each position will increase either because of inflation or because of changes in the local market area for the past several years ranges have gone up an average of 3%, but historically the increase has been closer to 6%. General salary increases are designed to have employees keep pace with the pay of peers in other agencies. Rises in the salary levels of the individual people will be dependent on the overall increase applied to each salary range and the individual performance ranking of outstanding, above average, average, or below average. An average performer should get no more than the general range increase. The standard agency will have around 60% of the total employees at the average level with 30% above average, 5% outstanding and 5% below average (presumably people on the verge of exiting). These general guidelines should be communicated to the employees to reinforce the understanding that most people will perform in an average manner and that to really get ahead, they need to strive to be in the elite few that are above that level. Pay increases for improved performance are investment spending. There are few other opportunities that an agency will have where the yield is higher and the risk is lower. Because there is only so much economic value to service and support positions in agencies, there has to be a top to the salary range. What do you do about a good performer who has reached the position ceiling and does not want (or is not qualified) to enter sales or management? First determine whether it is possible to promote them within the job-from CSR to Sr. CSR, for example. Such an administrative promotion leaves them in effectively the same job but it gives them additional duties and responsibilities. When that option has been exhausted, you simply have to make do with bonuses based upon incentives. It is your job as manager to convey the realities of the business world to these employees in such a way that they understand and accept the situation. Some agencies directly tie volume of work handled to the person's place in the salary range and to the percentage of increase that they will receive. Others provide separate incentive bonuses above slightly lower base salaries for CSRs that can handle more work than some of the others. To use either one of these approaches, you have to know with a reasonable degree of accuracy how much the average CSR can handle. An incentive program that is based upon inappropriate measurements is worse than no incentive at all. Although the number is decreasing, there are still some agencies that provide an incentive for personal lines CSRs to sell policies and round out accounts. If this is done, the base salary range should also be slightly lower. The extra incentive can be a percentage of commissions or a flat amount per policy sold (roughly equivalent to 50% of the average commissions per policy in the agency). It has been our experience that this type of incentive program does not encourage CSRs to sell unless it is also tied to other motivational activities, but it can provide some extra income for people working in agencies that have not been able to afford to raise salaries much over the past several years. Incentives that tie the bonuses paid to overall agency or department performance are now being used much more extensively for the non-sales staff as well as for managers. The following is a dual program that can work in any size agency with larger ones being able to use departmental basis. The emphasis is on growth, profitable business, and productivity since the fewer the people that it takes to accomplish the results, the more each receives individually. Play with the percentages both for the goals and for the payout. Make sure that the objectives can be reasonably be accomplished in your agency and that the reward is high enough to provide real incentives and yet not so rich that it breaks the bank. It should also be recognized by everyone that zero bonus awards are inevitable in some years. Agency Incentive Plan-Payout is 5% (more or less) of contingent income received and/or 5% (more or less) of commission growth in agency or department. Employees may have bonus shares based simply upon head count for people who have been with the agency for the full year and pro rated for others. Or the bonus shares could be based upon the performance review. For example, an employee that receives an outstanding rating gets 2 shares, above average--1.5 shares, average-one share, etc. Managers may receive additional shares in the general pool or may be set upon a separate program that also takes profit of the agency/department into account. Profit should only be used, however, if the manager has control over this area. There are many variations to this type of incentive program. You might want to base it only on new sales or on a specific retention rate. Certain lines of business could be included or excluded as dictated by the agency's business plan. Agencies located in a volatile employment market want to build golden handcuffs into the program by deferring payment for a year. Depending on the perpetuation plan, this mechanism could be used to get employees involved in actual agency ownership. Or it could be used for the distribution of phantom stock. One agent in rural Kansas had his own unique bonus program that he shared with us: I have one employee who receives a bonus each year of six cows and six calves with an approximate value of $6,000. She keeps the cows and sells the calves the next year which increases the bonus yearly. Whatever fits your agency situation . . . Whatever works . . . We expect that most will start using incentive bonus programs like the ones described above. These plans reinforce the commitment by the employees to the organization and to work excellence. It's been our experience that this is one of the best ways to accomplish the elusive team spirit that we believe will be critical for success in the nineties. You have to remember, however, that these success-sharing programs will only work in successful agencies. That means that the agency must have owners and producers who are willing and able to be constantly selling new business while working with the staff to retain the existing book. ...

Ownership Issues And Compensation
  OWNERSHIP ISSUES AND COMPENSATION by Carol Hammes During the past several months we have been addressing methods for compensating agency staff, managers, and salespeople. How should the owners fit into these programs? For smaller agencies the tendency generally has been to compensate owners using a 'what's-left-over' method. After all the bills are paid, the owners divide up the remainder based on their respective ownership positions. This is undoubtedly the most reasonable approach for the first several years of operation, or in situations where growth has been minimal and there is only one or possibly two owners. When the revenues have increased to $500,000 or so, it becomes important to start operating the agency more like a business organization. You must begin to treat the owners as employees for initial compensation purposes. After the owners are paid for their services in the area of sales or management (i.e., what they would be paid to do the work that they were doing if they were not owners), they can then divide up the return on ownership (when there is any). If the firm is structured as a partnership or as an 'S' corporation, the profits can be divided up according to ownership interest. Agencies operating as 'C' corporations, however, need to be careful about the allocation. If you take large bonuses at year-end that coincidentally leave a minimal corporate profit and/or if these bonuses are given out in the same percentages as the ownership interests, the IRS (ever on the lookout for more tax dollars) may decide that the distribution of bonuses to owners is really a dividend that should be paid with after-tax dollars. The IRS allows a business to deduct 'a reasonable allowance for salaries or other compensation for personal services actually rendered.' Factors that are mentioned by the IRS in its publications and by the courts in cases regarding the 'reasonableness' of compensation include: Comparison with compensation paid to executives in comparable positions The person's qualifications for the position The nature and scope of the duties performed and of the business itself Comparison of compensation paid with the company's gross and net income Company's compensation policies for all employees The IRS does not usually raise the reasonableness issue if salaries and bonuses are not particularly high. But as the amount paid increases, it becomes important to build a case that compensation for all employees is fair. It is also a good idea from a purely business point of view to pay everyone (including owners) a level of compensation that is commensurate with their market value for performing the required managing, servicing, and/or selling duties. At the beginning of the year, structure a written bonus plan that is based on individual and agency performance. The people who produce the most and contribute the most to the overall success of the agency will be rewarded appropriately at the end of the year. Many tax advisors recommend that this bonus plan be included in the minutes at the Board of Directors meeting at the beginning of the year to avoid the impression that the amount of salary and bonus is based simply on the amount that the shareholder-employees wish to withdraw from the corporation for a given year. Firms that choose to look at agency ownership as an asset that is supposed to produced an annual return for its owners can creatively build in factors that will allow owners to receive bonuses that are based pretty much on their ownership interest, without making it appear that way. It is, after all, your prerogative to 'sell the agency to yourself' over a period of time and to do it in such a way that the government gets as little as possible. Just do your best to camouflage your activities to reduce your chances of losing the corporate tax deduction for your payments. In light of the dramatic changes that have taken place in the value of insurance agencies, the tax treatment of ownership transfer methods, and the prevailing attitudes of younger producers, many successful agencies are now re-evaluating this traditional approach to agency ownership. It used to be that for a minimal investment an individual could obtain significant ownership interest in an insurance agency and then ride the growth, making good money along the way, until it was time to cash in for big dollars. Although it is still possible to do this, it is not as easy as it once was. The potential agency profit margins are not as high as they were in the 1970s and early 1980s so there is less cash available. And more important, the perception among the younger people in the agency is that the return in the future might not be worth even that minimal investment. They want to be rewarded for their own performance but they are often unwilling to take much of a risk on the performance of the agency as a whole. Some of the more progressive agencies nationwide are now looking at the entire ownership issue in conjunction with, and as an integral part of, their sales and management plans. Although there are certainly exceptions to any generalization, it is usually true that salespeople are most successful in building their book of business during the middle of their career - from about age 35 to 50. During this time they might be contributing much more to the growth and value of the agency than someone who has substantially more ownership due to his age and longevity in the agency. The perception on the part of the more active salesperson is that, by virtue of his ownership position, the other guy is reaping the rewards that should be going to the person that is creating the additional revenues and enhanced value. It could be that the older person was unable to take out much money during the period of time that he was at his highest level of productivity and that the current return is therefore truly justified. But, in the absence of any formal compensation plan that details this delayed and justifiable reward for performance, the perception is that the ownership percentages and/or the compensation that is based on ownership is simply not fair. Once this perception takes hold, morale issues become paramount and sales decrease. People who were the key elements of the agency's internal perpetuation plan are no longer willing participants and the plan is in jeopardy. By re-structuring the agency's approach to compensating owners and non-owners alike for today's performance, you can keep the level of motivation high and facilitate the internal ownership transfer at the same time. There are a number of different ways to give people 'credit' now, based upon today's performance, for ownership or compensation that will come to them in the future. In a previous article, we discussed the practice of awarding deferred compensation to producers in return for their sales efforts (vesting programs). The following chart presents some other compensation/ownership options that can provide direct rewards for performance while assisting in internal ownership transfers. COMPENSATION/EQUITY PLANS DEFERRED COMPENSATION Arrangement to pay employee/producer in the future for services or production rendered currently. These plans are generally nonqualified and contain contingencies which might cause the employee to forfeit the future rights. Plans can be funded with Life insurance or annuities and employees can obtain protection from loss of the benefits with Rabbi Trusts. Can provide 'golden handcuffs' to keep managers as well as producers (through vesting programs). TAX TREATMENT: Employee-Payments are taxed as ordinary income when received. Agency-Premiums for funding (if any) are not deductible. Payments are deductible when paid. STOCK APPRECIATION RIGHT Rights granting a portion of the increase in value of the common stock of the agency from the time when it is granted to when it is exercised. Agency can value stock lower and accrue value in the form of deferred compensation. Can be used in conjunction with other forms of stock options. Recipients can or cannot be shareholders at the time and this can be another 'golden handcuff' opportunity or can be used to secure a covenant not-to-compete. TAX TREATMENT: Employee-Value of the rights is taxed as ordinary income at exercise. Agency-Deduction in amount of employee's taxable income at payment INCENTIVE STOCK OPTION Option to purchase corporate shares at 100% (or more) of value on date of grant for a period of up to 10 years. Allows employee to receive lower (frozen) value but can wait to pay until more cash is available from future production/salary. TAX TREATMENT: Employee-Capital gains treatment on sale of stock on increase in value from date of grant (some additional requirements might apply). Agency-No tax deduction. PHANTOM STOCK Units analogous to agency stock are granted. Value of the units equals appreciation in value of stock. Units are valued at a fixed date (retirement or 5-15 years after grant). Payments may be made in cash or stock or both. TAX TREATMENT: Employee-Value is taxed as ordinary income on payment date and is subject to withholding. Agency-Deduction in amount of employee's taxable income at payment. NONQUALIFIED STOCK OPTION Option to purchase corporate stock at stated price over time (often 10 years). Option price normally equals 100% of value at date of grant but may be set lower. TAX TREATMENT: Employee-Excess of fair market value over option price is taxed as ordinary income at exercise and is subject to withholding. Agency-Deduction in amount of employee's income from exercise. RESTRICTED STOCK Award of stock with no or nominal cost to producer/employee that is non-transferable and subject to risk of forfeiture. Restrictions lapse over a period of time. TAX TREATMENT: Employee-Excess over price paid (if any) is taxed as ordinary income when restrictions lapse and is subject to withholding. Agency-Deduction in amount of employee's taxable income at date employee is taxed. JUNIOR STOCK Opportunity to purchase junior stock for discounted value which will become convertible into regular stock (at 1:1 ratio) if specified performance goals are reached. Usually non-voting and non-transferable until converted, but may be re-purchased by corporation at original value if performance goals are not reached. TAX TREATMENT: Employee-Capital gains on difference between amount paid and amount received at time of sale. Agency-No deduction if sold at fair value; may get deduction on discounted amount. CAREER SHARE Opportunity to purchase book value (career) shares that are convertible upon reaching performance/longevity goals into agency stock at market value. Conversion ratio of book to market value is usually set at time of purchase. TAX TREATMENT: Employee-Capital gains on difference between amount paid and amount received at time of sale. Agency-No tax deduction. PERFORMANCE UNIT/CASH Performance award granted as units that are either fixed dollar with the number of units based on predetermined goals or a fixed number of units with the payment value varying based upon performance goals. Goals can relate to production or to department growth or profitability for managers. Payment can be cash or stock. TAX TREATMENT: Employee-Value is taxed as ordinary income on payment and is subject to withholding. Agency-Deduction in amount of employee's taxable income at payment. COMBINED PERFORMANCE UNIT & OPTION Simultaneous grant of performance units and non-qualified stock options. Cash payout from units enables employee to pay taxes on option exercise. TAX TREATMENT: Employee-Payment for value of units and for excess of market value over option price is taxed as ordinary income and is subject to withholding. Agency-Deduction in amount of employee's taxable income at payment. GOLDEN PARACHUTE Compensation arrangement for non-owner producer or employee to receive severance benefits in the event that the agency is sold. This is often part of the employment contract and the payments are based on the size of the book of business, ending salary, and/or longevity. TAX TREATMENT: Employee -- Earned income. Agency -- Deductible as compensation. General Guidelines: Check with your accountant or tax attorney for specifics in your situation. In most of these plans, the recipients receive promises of either cash or ownership to be received in the future, with the amounts based clearly on the production or management expertise exhibited during the current year. With these programs, employees can participate in the growth of the agency value even when a true equity position is not available for one of the following reasons. The agency may be owned by a third party (such as a financial institution) where internal employee ownership is not possible. Or the existing owners may not be willing to share current ownership or promise ownership in the future because they have not yet decided whether they want to sell externally. Or they may be 'saving' the agency for their children. Sometimes it does not make sense to track the rewards with total agency performance. For example, producers might write a certain type of business that complements but does not fit into the mainstream of the agency's business (Life, Group, Professional Liability, Surety). In those situations, the programs can be set up to reward the producers on a more individualized basis. For example, it could be more appropriate to have them 'vest' in a deferred compensation plan that will pay them a return on their book of business or on the profits of their department. The beauty of most of these plans is that the reward can be set up so that it could eventually be converted into equity in the agency if circumstances change or if the individual proves to be the type of ownership material that the current owners are looking for. And in the meantime, you are providing something of present and future value that keeps the employees motivated. Of course, there are some negatives to be considered in assessing whether these approaches are right for your situation. Many of them can be funded for death or disability but not for retirement or termination. This could put a cash bite on the agency in the future. Most are not qualified plans and therefore do not fall under ERISA protection, which might be of concern to the employees. And the conversion period from the more traditional buy-in and buy-out approach to ownership to a performance-based compensation/ownership system can be difficult in an agency where current owners are getting close to retirement and hbeen counting on receiving the formula value in the existing buy-sell agreement. This value could be as high as two times annual commissions, and a lot ave probably of agreements still use 1.5 times. Many agencies barely have enough cash flow to support such high values, even without the added financial burden of the new performance-based stock or ownership incentives. During the conversion period, the existing owners might have to take a discount off of the value that they had originally been expecting so that the agency can implement the new perpetuation program. The reality is that, without the revised approach, they might have difficulty accomplishing an internal transfer at ANY valuation level. And the chances of finding an external buyer who is willing to pay two times or even 1.5 times are getting slimmer. Taking a discount might be the only way for current owners to sell out. So why not do it in such a way that you create a dynamic group of motivated employees who are, through their own efforts, buying into the future of the agency? If you stick around for a couple of years, you might even recoup the discounted amount! The late Carol Hammes, principal of the Middleton Group, was one of the Independent Agency System’s most widely respected management consultants. She will be sorely missed. Reproduced, with permission, from The Middleton Letter. ...

Producer Relations
PRODUCER RELATIONS by Carol Hammes Despite tough market conditions and economic recessions, some insurance agencies are thriving. While the average agency has grown at an annual rate of 3% over the past several years, these super agencies are continuing to grow at compound rates in excess of 10% with profit margins at levels that most agents only dream about. In our consulting work and in the research for this newsletter, we are constantly on the lookout for those qualities that are common to the better agencies so that we can pass the information along. Over the last several years it has become increasingly evident to us that one of the keys to operating a successful agency in today's marketplace is to make a clean break with the past. You literally have to start over from scratch, rethinking every aspect of the organization and re-tuning it to run under a new and sometimes very different set of rules. Take the concept of loyalty, for instance. Once upon a time (not so very long ago) it actually meant something to have had a long-term contract with an insurance company, insureds stuck with the agency despite price variations, and employees put more value on security and longevity of employment than they did titles and advancement opportunities. Sales and management techniques that helped you establish and maintain relationships 10 or 20 years ago are of little use today. The agencies that are doing well are lead by people who have been able to change their attitudes and their way of doing things. No longer do they rely upon loyalty to carry them through. They actively pursue and nurture those relationships that they have identified to be the most beneficial to their agency's future. One of the most critical and yet tenuous relationships is with the salespeople. Successful agency managers spend more time with producer relations than they ever did before. We suggest developing new ideas and strategies for beginning a relationship with producers. These changes can also benefit your relationship with existing producers. Pretend as though they are new to the agency. Evaluate their technical, sales, organizational, and time management skills and develop a training program to fill in the gaps. The evaluation is actually a lot easier to do with existing employees than it is with new hires because you have been able to observe their work habits and knowledge first hand. When setting goals and detailing the action plan, however, your personal experience with the person may be a hindrance. You may be tempted to gear the objective to what they have been able to accomplish in the past. Forget about what has (or has not) happened and focus the goal setting on what you would expect a new employee with the same level of education and experience to accomplish. This process will provide both the agency and the producer with the opportunity to make a fresh start. The agency's lackadaisical approach to sales management may have been a major cause of the producer's failure to produce as well as you both had hoped. By providing the direction and guidance now, you may be able to salvage this person's potential and turn him or her into a more valuable member of the team. At the very least, you will be setting up a program that will allow you to fairly and legally rid the agency of costly dead wood. An integral part of the new relationship with the producers will be the agency's specific definition of what it wants producers to sell since it makes sense to have them concentrate on accounts that they have a good chance of attracting and retaining. This means that you have to review the current appetites of the major carriers and decide whether the producer should be a generalist or whether he or she should specialize in a certain type or size of account or in a particular line of business. It is important to consider the producer's own experience and desires, but the final decision should be driven by the availability of competitive products and services from major markets and the agency's overall business plan. Agency management also has to decide what each individual producer is expected to sell to the identified accounts. Options include: new coverages to new account; new coverages to existing accounts originated by the producer; new coverages to accounts assigned to the producer; renewal coverages to accounts originated by the producer; renewal coverages to accounts assigned to him/her; all of the above. Another key element of the new relationship will be to clearly define the producer's role in the sales and servicing of these targeted accounts vis a vis the agency support staff. Prior to the time that agencies implemented sophisticated computer systems and hired expensive technical staffs, producers were responsible for all aspects of the sales and service effort. In most agencies this is no longer the case. But the change in duties may not have been clearly communicated to everyone concerned. This confusion results in personnel problems between the producers and the support people. It is also at the heart of the never-ending battle over producer compensation. Salespeople who have been around for a number of years remember when they were paid 45% or even 50% on new and renewal personal and commercial lines accounts. They therefore feel that they are being cheated if the agency reduces those percentages or stops paying for renewals on personal lines or the smaller commercial accounts. In 'starting over' with all of the producers, agency owners can spell out in detail the level of support that is being provided by the agency and how that back-up gives the producer the opportunity to relinquish non-productive tasks so that he or she can truly have more time to sell. Does the agency provide personnel and/or computers that handle all (or some) of the marketing and placement, loss control and risk management activities, telemarketing/direct mail leads or appointments, completion of applications and checklists, calculating of new or renewal quotes, preparation of proposals and correspondence, tracking of sales activity, etc.? What exactly is the producer's role in prospecting, selling, and servicing accounts in your agency? Communicate these duties verbally and through the use of written job descriptions for the producers as well as for the support and service positions. Compensation and Motivation The compensation plan is a critical part of the agency's relationship with its salespeople. No matter how well the role is defined, the producer has to believe that the level of compensation is fair for what he or she is being asked to do. What you pay must be based upon what the agency is expecting from the salesperson and what services and other support the agency is providing to assist him or her in performing the job that has been defined. This is why the compensation will differ from one agency to the next and in many cases from one producer to the next within the same agency. In situations where the agency provides a high level of support, the producer's percentage will have to be 10 to 15 points less than it is in an agency where the salespeople handle everything. Likewise, in agencies where there is little or no 'house' business to cover basic overhead, the percentage that goes to the producers will have to be lower. To determine what is fair compensation to the sales force in your agency, subtract your targeted profit margin and the cost of operations from agency revenues. What's left over will be the amount that you can afford to pay to the producers. Agencies that provide the 'standard' level of support, have about 20% of their revenues from house business, and those that want a 15% profit margin will find that the overall percentage that they can pay to producers will be in a range from 27% to 33% of commissions. The level of employee benefits and travel/entertainment/auto expenses provided will dictate whether you are at the high or low end of this range. Remember, there are always valid exceptions to every guideline. Most of the more effective producer compensation plans that we have seen contain three distinct elements: a basic living allowance in the form of a salary or draw; incentive pay based upon some formula related to performance; and a piece of the future such as 401(k) contributions, profit sharing, ESOP, vesting, partnership, or ownership of business. If the primary thrust of the job is to service existing business, the incentive portion may simply be the opportunity for a raise in the salary. If the producer is strictly sales-oriented, the incentive portion may make up virtually all of the compensation. If the agency wants to emphasize new sales, the incentive should be weighted in that direction. When you have determined what you can afford and how you want to pay the sales people, it is very important to show them exactly how the plan will work if they meet the goals that have been established. Anything that you can do to eliminate the potential for misunderstanding will definitely improve the results that you get as well as the overall working relationship with producers. An effective compensation plan allows the producer a draw against the formula of 40% on new commercial commissions and 25% on renewal. We recommend that the draw be based upon 90% of what the formula produced the prior year to avoid having the producer 'owe' the agency some of the draw if several large accounts are lost during the year. The balance that the formula produces during the current year would then be paid as a bonus twice a year. Initially, the draw should be based upon what the formula would pay after the second year of production when you expect the producer to validate. More experienced producers that might have $175,000 in commissions at the end of year two could therefore be paid a draw of $50,000 whereas a person new to the industry might be only paid a draw of $20,000 assuming much lower production goals. One option is to set the initial compensation draw at $25,000. Note that the producer must 'make up' the production deficit before receiving the full formula commission percentage. Our formula shows compensation of $33,925 due the producer in year two (based upon 90% renewal retention rate: $40,500 x 25% = $10,125; $59,500 x 40%...800; $10,125 + $23,800 = $33,925) but the producer had to cover the $7,000 deficit from year one so the amount he or she received out of the basic commission formula was only $1,925. The compensation plan we propose provides for an extra bonus amount that is based upon the producer exceeding the expected production goals. This agency will pay the producer 50% of all commissions received in excess of the goal. In the second year this producer had a goal of $95,000 and actually brought $100,000 of commissions into the agency. A bonus of $2,2500 (50% of the $5,000 excess) was paid at the end of the year. In the third year, the goal was exceeded by $10,000 and the bonus was $5,000. This extra incentive gives them a reason to push a little harder and still provides the agency with the basic income necessary to cover expenses. To address the future needs of the producer you should include a deferred compensation program that allows him or her to vest in the value of the accounts that have been produced. In this particular program the producer will accrue value beginning with the third year of employment. The vesting might be 10% a year up to a maximum of 50%. The value of the deferred compensation is the vested portion of 'one times' the annual commissions. This deferred compensation will be payable to the producer over three years after termination of employment as long as he or she honors the agency's non-piracy restrictions. At the agency's option, the vested value may also be converted to agency stock at some point in the future. There are many variations of this basic type of producer compensation plan. The basic percentage can be adjusted to accommodate different business plans. Some examples include: 45/20 in agencies where new business is being emphasized and where the support staff handles more of the renewal activities 45/15/5/0 for small commercial accounts with little growth potential 50/0 for personal lines accounts in agencies with professional CSRs handling servicing 30/30 on larger commercial accounts where a higher level of producer involvement is necessary for servicing and renewal sales 35/35 on jumbo accounts The incentive bonus can be based upon a percentage of the excess over the goal as we have done in this action plan or it can be an increase in the base percentage if the book exceeds a certain size. For example, in year two instead of paying 50% of the excess $5,000 in produced commissions over the goal, the base percentage for new production could be increased to 45% from 40%. By exceeding the $95,000 goal, the producer would have the 45% factor applied against the $59,000 in new commissions rather than 40%. This revised formula would result in additional commissions paid to the producer of $2,975 instead of the $2,500 bonus. Some agencies set up a number of different commission rates for different sized books of business, but you have to make sure that the computer system can handle this effectively or the administrative costs become prohibitive. Another way of rewarding producers when they hit certain production levels is to give them a new title, an increase in the car allowance or expense budget, a larger office, a dedicated CSR, etc. Sometime these types of recognition will provide more incentive than simply increasing the bonus or commission percentage. When developing a producer relationship you need to remember that money is not the only motivator and that each person has his or her own needs. The more you do to meet them, the more successful the relationship will be. The total compensation and motivational program must be individualized for each producer but it is also important to tie the fortunes of the salespeople to each other and to the success of the agency. This is where the sales contests come into play. Have a number of different programs going at once, some that are monthly, some quarterly, and at least one that is an annual contest. Rewards can range from a traveling trophy, a weekend in a nearby city, the right to go on an insurance company bonus trip, a 4 or 7 day cruise or ski trip, a monetary bonus. Criteria for 'winning' can be the producer (or team) with: the largest percentage of growth; the highest commission dollar increase; the highest number of new accounts written; the best hit ratio of written/quoted; or any other measurable item related to sales activities. There are four basic rules to follow if you want to conduct a successful promotional campaign. The rewards have to be meaningful, the goals must be attainable, the administration of the rules must be fair, and the participants must be kept informed of their progress vis a vis the progress of the other producers. More often than not, one of these items has been overlooked and the contest fails to provide the motivation that you had hoped for. This article was reprinted with permission from Carol Hammes, editor of the Middleton Letter.

The State Of Risk-Management Education
Professional designations are conferred by a professional body that has specific entry requirements, such as a code of ethics, a set of practice standards, educational objectives, and industry experience and involvement. Here are some current risk-management educational programs: ASSOCIATE IN RISK MANAGEMENT (ARM) Behind the Program: Insurance Institute of America (also offers up to 20 other insurance associate designations and the CPCU) Prerequisites: None Program Format and Exam: Self-study or 14-week preparation courses. Examinations are administered nationally three times per year. Beginning in December 2000, ARM students will be able to take computer-based exams any time, at locations that have yet to be determined. Subjects Program Covers: Essentials of risk management Essentials of risk control Essentials of risk financing Continuing Education Requirements: None Cost to Complete Program: Books: $125 per course Exams: $96 each Classes: Locally sponsored classes average around $290 each Total: Self-study-up to $700; with classes -- up to $1,700 Program Director: George Head Web Site: www.aicpcu.org E-mail: Send E-mail to George Head CERTIFIED RISK MANAGER (CRM) Behind the Program: The National Alliance for Insurance Education & Research (also offers the CIC and CISR designations) Prerequisites: None, though catalog suggests two years of risk management experience Program Format and Exam: Must take seminars, which are given at different locations around the country. Seminars typically have a half-day session on Wednesday, full-day sessions on Thursday and Friday, exam on Saturday morning. Subjects Program Covers: Risk-management essentials Risk analysis Risk cont...ng Risk administration Continuing Education Requirements: Must attend one National Alliance for Insurance Education & Research program every year Cost to Complete Program: Course (includes exam and materials): $395 Total: Five classes: $1,975 (not including costs to travel to seminar locations, such as airfare and hotel) Program Director: Wayne Dauterive Web Site: www.scic.com/alliance E-mail: Send E-mail to CRM FELLOW OF THE INSTITUTE OF RISK MANAGEMENT (FIRM) Behind the Program: The Institute of Risk Management, a U.K. organization offering risk-management training worldwide Prerequisites: FIRM-must have AIRM degree (Associate of the Institute of Risk Management), five years of risk-management experience, evidence of personal development, 4,000- to 5,000-word dissertation; AIRM-must have a degree or professional qualification Program Format and Exam: Self-study. An assessment paper is given to students on December 1 and must be completed and returned to IRM for a grade by March 1. Students must receive a passing grade on the paper, which accounts for 25% of the overall grade. Subjects Program Covers: AIRM Business organization and finance Risk analysis Risk control Risk financing Corporate risk management One additional elective course Continuing Education Requirements: Associates and Fellows are required to complete 300 points in three years. Points are awarded based on the Continuing Education activity, such as five points for writing an article on risk management or 10 points for attending a seminar. Cost to Complete Program: Student registration: $340 (one-time fee) Exam fee: $343 per subject Materials: $355 per subject Student forum: $3,175 (optional) Total: $3,830 or $7,005 with student forum Program Director: Maureen Gibbons Web Site: www.figtree.co.uk/irm E-mail: Send E-mail to Maureen Gibbons FELLOW IN RISK MANAGEMENT (FRM) Behind the Program: Risk and Insurance Management Society, Inc. (RIMS). RIMS codeveloped the ARM program with IIA more than 25 years ago and offers ARM study courses. The FRM is the first professional designation RIMS has offered. Prerequisites: Must first complete the ARM series or its Canadian equivalent, the CRM Program Format and Exam: Must take the required courses at a university or college. Students can apply for exemption from up to seven courses already taken but must still pay the $50 course registration fee to RIMS. The first Capstone Exam will be in June 2000 and will be given biannually after that. Subjects Program Covers: Managerial accounting Managerial finance Business law Management of information systems Three additional electives (such as Business Ethics, Holistic Risk Management, Alternative Risk Financing, Economics) Continuing Education Requirements: Nine hours per year in such activities as completing or teaching a course, publishing an article, or volunteer work. Cost to Complete Program: One-time application fee: $50 Course registration fee: $50 Capstone exam fee: $125 Certificate and pin: $100 Classes: Up to $400 each Total: Up to $3,300 (not including books) Program Director: Amy Geffen Web Site: www.rims.org E-mail: Send E-mail to Amy Geffen CHARTERED PROPERTY AND CASUALTY UNDERWRITER (CPCU) Behind the Program: The American Institute for Chartered Property Casualty Underwriters (AICPCU) Prerequisites: Three years of experience in the insurance industry Program Format and Exam: Self-study or classes. Exams are given three times per year in centers across the country. Subjects Program Covers: Ethics Insurance perspectives and insurance contract analysis Personal insurance and risk management Commercial Property insurance Commercial Liability insurance Insurance operations Legal environment of insurance management Accounting and finance Economics Related studies Continuing Education Requirements: Not required, although it's available Cost to Complete Program: Exams: $119 each Books: Up to $1,000 total materials Classes: $320 per class Total: Self-study-up to $2,200; with classes-up to $5,100 More Information: Visit www.aicpcu.org or contact George Head FINANCIAL RISK MANAGER (FRM) Behind the Program: Global Association of Risk Professionals, an international not-for-profit organization in financial risk management Prerequisites: Minimum of two years of experience in financial risk management or related field. Must be an active member of GARP. Program Format and Exam: Self-study. GARP offers a study guide and a review course that's available only in New York, London and Japan. The course takes place over a one-month period leading up to the exam. Subjects Program Covers: Quantitative analysis Capital markets Market risk management Credit risk management Operational and integrated risk management Legal, accounting, and tax risk management Regulation and compliance Continuing Education Requirements: None. Must pay GARP annual membership fees Cost to Complete Program: Examination fees: $300 Required books: $500 Prep classes: $750 Total: Self-study -- $800; with review course -- $1,550 More Information: Visit www.garp.com RISK MANAGEMENT FOR PUBLIC ENTITIES (RMPE) Behind the Program: Public Risk Management Association and the Center for the Advancement of Risk Management Education (CARME), a division of IIA Prerequisites: None Program Format and Exam: Self-study. Order the RMPE textbook and course guide, study them, and take the exam. You must register for the exam and select someone to administer it and return it to CARME to be graded. Subjects Program Covers: Risk management from a public entity perspective Public entity exposure identification and analysis Risk control Claim and litigation management Risk-financing resources Pooling for public entity risk financing Continuing Education Requirements: None Cost to Complete Program: Textbook, course guide, and exam fee all-inclusive Total: $145 More Information: Visit www.aicpcu.org or contact George Head Adapted from riskVue, the free monthly online magazine for risk-management and insurance professionals. See the lastest edition of riskVue at www.griffincom.com/riskVue/riskVue.htm. Volume 20, Issue 8 of The Risk Management Letter discusses and analyzes these risk-management educational programs. To order an issue reprint, call (949) 752-1058. RML Interactive, the online supplement to The Risk Management Letter, has links to interviews with program directors, conversations with students and instructors, and additional program information.

Crisis Management Plan - Operational Overview
CRISIS MANAGEMENT PLAN OPERATIONAL OVERVIEW   Prepared by: RICHARD H. SOPER, CMC, CSP Principal SOPER & ASSOCIATES, LTD.   THE FREQUENTLY MISSING RISK MANAGEMENT PROGRAM SEGMENT Presented to: WASHINGTON CHAPTER RISK AND INSURANCE MANAGEMENT SOCIETY SEATTLE, WASHINGTON NOVEMBER 15, 1994 COPYRIGHT 1994 RICHARD H. SOPER CRISIS MANAGEMENT PLAN OPERATIONAL OVERVIEW THE FREQUENTLY MISSING RISK MANAGEMENT PROGRAM SEGMENT Focus: RISK AND INSURANCE MANAGEMENT PROGRAM VITAL CRISIS MANAGEMENT STRATEGY Presented to: WASHINGTON CHAPTER RISK AND INSURANCE MANAGEMENT SOCIETY SEATTLE, WASHINGTON NOVEMBER 15, 1994 Prepared by: RICHARD H. SOPER, CMC, CSP Principal SOPER & ASSOCIATES, LTD. PO BOX 39 KIRKLAND, WASHINGTON...13   IMPORTANT: COPYRIGHT NOTICE Note that the majority of crisis, risk and insurance management strategies, methodologies, tactical systems and/or consulting practices herein identified have been copyrighted by Richard H. Soper or Richard H. Soper, Inc., dba: SOPER & ASSOCIATES, a State of California corporation or SOPER & ASSOCIATES, LTD., a State of Washington corporation or in articles or texts authored by Richard H. Soper and appearing in: Risk Management, Risk & Benefits Management, Risk Management Reports and/or published in copyrighted text by: Risk and Insurance Management Society, Inc., New York, New York, Prentice Hall Company, New York, New York and/or the Insurance Institute of America, Malvern, Pennsylvania and/or 'Crisis Management' Chapter XXII, Environmental Risk Management, A Desk Reference, RTM Communications, Inc., Alexandria, Virginia. Also note that this crisis management syllabus as prepared for the Risk and Insurance Management Society, Washington Chapter and identified as 'Crisis Management Plan Operational Overview', SOPER & ASSOCIATES, LTD.' is copyrighted by Richard H. Soper effective 1994.   PREFACE AND ACKNOWLEDGEMENTS WASHINGTON CHAPTER RISK AND INSURANCE MANAGEMENT SOCIETY SEATTLE, WASHINGTON This syllabus identifies the Crisis Management Plan as a critical segment of the risk and insurance management program. The Crisis Management Plan encompasses crisis management plan strategy, formulation and implementation as well as on-going operational maintenance. The intent of this Syllabus is to provide a summarized crisis management strategy applicable to a major private or public sector organization. The proposed strategy is also readily adaptable for the small to medium size organizations. The emphasis of this Crisis Management Plan syllabus focuses on attainable objectives associated with life safety, operational continuity, asset conservation, post-crisis image enhancement opportunities and financial survival. The Syllabus is not considered as a panacea, but merely represents an appropriate operational strategy overview. Furthermore, the crisis management strategy presented entails two equally important interrelated tasks: (1) strategy formulation and (2) strategy implementation. The Crisis Management Plan should be considered an integral component of an existing risk and insurance management program and interface with business and operating objectives, policies and procedures as well as long-term goals. Regardless of the size of the organization, essential ingredients in the formulation and implementation of an effective Crisis Management Plan strategy are predetermination of sequential task actions, appropriate priorities and delegation of management authority. Initiating emergency action in an organization with formulated Crisis Management Plan policies and procedures simply becomes a case of immediately implementing the previously established action plans. This involves a logical sequence of activities with pre-determined priorities in compliance with previously established crisis management policy. Despite the most effective planning activities concerning risk and insurance management as well as loss control, crisis and catastrophes must still be anticipated. I am convinced that the results of these losses can be mitigated by utilization of a Crisis Management Plan which encompasses risk identification, measurement, loss control, legal compliance and management accountability. Furthermore, appropriate emergency response capability, training adequacy and restoration strategy should be ensured with a primary focus on pre-loss planning and post-loss recovery. This syllabus has been formulated with a Table of Contents, Preface and Acknowledgements, four major divisions which include sixteen specific sections. The following represents a topical outline of the divisions and sections of this syllabus: PREFACE AND ACKNOWLEDGEMENTS DIVISION I CRISIS MANAGEMENT INTRODUCTION Frequently Missing Risk Management Segment Defining Crisis Management Crisis Management Plan Justification DIVISION II CRISIS IMPACT CONSIDERATIONS Crisis Exposure Assessment Crisis Vulnerability Identification Crisis Exposure Awareness DIVISION III CRISIS MANAGEMENT PLAN DEVELOPMENT Plan Organization and Timing Plan Strategy and Responsibilities Plan Emergency Response Strategy Plan Formulation and Implementation Plan Recovery Strategy Crisis Management Plan Manual DIVISION IV CRISIS MANAGEMENT PLAN OPERATION Maintaining an Effective Crisis Management Plan Managing Highly Sensitive Crises Crisis Management Plan Summary Crisis Management Plan Preparedness Exercise In addition to the above syllabus text, I have included a section of recommended crisis management references, my brief biography and a bibliography limited to my crisis, risk and insurance management published contributions. This overview syllabus is a composite of excerpts from the Crisis Management Handbook, currently under development by SOPER & ASSOCIATES, LTD. as well as from syllabi used in conjunction with the following presentations: Society of Risk Management Consultants, 1994 Fall Conference Santa Fe, New Mexico, October, 1994 Meeting Topic: Crisis Management Consulting Golden Gate Chapter, San Francisco, RIMS Meeting, November, 1990 Meeting Topic: Crisis Management Plan Los Angeles Chapter, RIMS Meeting, October 1989 Meeting Topic: Crisis Management Plan West Coast Regional RIMS Conference Otter Crest, Oregon, September 1988 Main Session Topic: Briefing and Case Study Crisis Management National RIMS Conference Washington, D.C., April 1988 Panel Topic: Crisis Management Strategy A brief summary of the previous syllabi (1988 and 1989) was accepted in a condensed format and published in Risk Management, the journal of the Risk and Insurance Management Society, Inc., New York, New York, appearing in the September 1989 edition under the title, 'Foresight Must be 20/20 When Creating a Crisis Management Program.' Risk Management, in turn, contributed this article to International Risk Control Review for inclusion in its October 1990 issue. I am convinced that a non-structured 'brush fire' approach, i.e., dealing with crisis situations as they develop is neither prudent nor acceptable in our current business climate. An effective Crisis Management Plan should be regarded as an integral segment of the risk and insurance management program and conceived of as a broad mitigation approach essential to financial survival should there be a catastrophic loss exposure. From a personal standpoint, the Chief Financial Officer, the Risk Manager, the Insurance Broker and the Underwriter should view an effective Crisis Management Plan as a vital career safeguard, thus contributing to continued professional growth. I would like to acknowledge the assistance derived from discussions with Laurence Barton, Ph.D., Penn State, Associate Professor of Management who has focused his teaching, research, development, and publishing efforts on crisis communication and crisis management. In addition, I would like to acknowledge the assistance in the field of crisis and corporate communications derived from discussions with Paul A. Argenti, Ph.D., Professor and Director of the Executive Programs, The Amos Tuck School of Business Administration, Dartmouth College. I am especially grateful for the assistance in updating and refining the current Crisis Management Syllabus derived from the SOPER & ASSOCIATES, LTD. consulting team. My sincere appreciation extends to the following consulting team members: Wesley J. Goss, M.B.A, MPA, Principal George H. Griffin, CPCU, ARM, Director William Glaezer, Ph.D., CET, Senior Consultant C. Bartlette Stroupe, Esq., J.D., M.A., Senior Consultant Annette D. McCully, Senior Consultant Virginia R. Sundt, Director of Administration In conclusion, I would like to express my sincere appreciation for the opportunity to present my position statement concerning crisis management, an evolving discipline, to the officers, members and guests of the Risk and Insurance Management Society, Washington Chapter. Respectfully submitted, Richard H. Soper Attachment: CRISIS MANAGEMENT PLAN SYLLABUS OPERATIONAL OVERVIEW TABLE OF CONTENTS PREFACE AND ACKNOWLEDGEMENTS SYLLABUS TEXT   APPENDICES A - CRISIS MANAGEMENT PUBLICATIONS B - ABOUT THE AUTHOR C - PUBLICATIONS BY THE AUTHOR CRISIS MANAGEMENT PLAN OPERATIONAL OVERVIEW THE FREQUENTLY MISSING RISK MANAGEMENT PROGRAM SEGMENT Prepared by: RICHARD H. SOPER, CMC, CSP Principal SOPER & ASSOCIATES, LTD. KIRKLAND, WASHINGTON Presented to: WASHINGTON CHAPTER RISK AND INSURANCE MANAGEMENT SOCIETY SEATTLE, WASHINGTON   TABLE OF CONTENTS   PREFACE AND ACKNOWLEDGEMENTS DIVISION I CRISIS MANAGEMENT INTRODUCTION 1.0 FREQUENTLY MISSING RISK MANAGEMENT SEGMENT 1.1 Risk Management Program Void 1.2 Warranted Crisis Management Plan 1.3 Comprehensive Risk Management Program Exhibit 1.1 Elusive Crisis Management Plan Segment 1.4 Inevitable Crises 1.5 Lack of Industry Stakeholder Awareness 1.6 Evolving Crisis Management Discipline 2.0 DEFINING CRISIS MANAGEMENT 2.1 Crisis Management Plan Overview 2.2 Crisis Definition 2.3 Crisis Management Plan Definition 2.4 Crisis Management Strategy Definition 2.5 Crisis Communications 2.6 Reliance on Effective Business Practices 3.0 CRISIS MANAGEMENT PLAN JUSTIFICATION 3.1 Effective Operational Management 3.2 Plan Expense Considerations 3.3 Plan Legal Requirements 3.4 Plan Advantages and Opportunities Exhibit 3.1 Crisis Management Plan Advantages and Opportunities DIVISION II CRISIS IMPACT CONSIDERATIONS 4.0 CRISIS EXPOSURE ASSESSMENT 4.1 Crisis Assessment Overview 4.2 Comprehensive Analysis 4.3 Evaluating Crises Exposures 4.4 Loss Magnitude Category Severity Rankings 4.5 Magnitude Assessment Schedule Exhibit 4.1 Crisis Magnitude Assessment Schedule 5.0 CRISIS VULNERABILITY IDENTIFICATION 5.1 Crisis Vulnerability Analysis Overview 5.2 Unique Loss Vulnerability Identification Exhibit 5.1 Schematic Vulnerability Flow Analysis 5.3 Insurance and Risk Funding Adequacy 5.4 Facility Location Considerations 6.0 CRISES EXPOSURE AWARENESS 6.1 Crises Exposure Awareness Overview 6.2 Legal Compliance Considerations 6.3 Litigation Crisis Exposure 6.4 Environmental Crisis Exposure 6.5 Earthquake Crisis Exposure 6.6 Volcanic Crisis Exposure 6.7 Crisis Awareness Focus Exhibit 6.1 Significant Crisis Events DIVISION III CRISIS MANAGEMENT PLAN DEVELOPMENT 7.0 PLAN ORGANIZATION AND TIMING 7.1 Key Crisis Management Plan Elements 7.2 Crisis Exposure Assessment 7.3 Crisis Management Plan Components Exhibit 7.1 Crisis Management Plan Organization 7.4 Crisis Management Plan Timing Exhibit 7.2 Crisis Management Sequential Timing 7.5 Prior to Crisis Timing 7.6 During Crisis Timing 7.7 Immediately Following Crisis Timing 7.8 Post Crisis Timing 8.0 PLAN STRATEGY AND RESPONSIBILITIES 8.1 Crisis Management Plan Strategic Objectives Exhibit 8.1 Crisis Management Plan Objectives 8.2 Plan Operating Strategy 8.3 Plan Committee Operation 8.4 Plan Operating Authority Exhibit 8.2 Crisis Management Plan Responsibility 8.5 Crisis Management Committee 8.6 Emergency Response Team 8.7 Predetermination of Priorities 8.8 Crisis Management Audit Committee Option 9.0 PLAN EMERGENCY RESPONSE STRATEGY 9.1 Emergency Response Strategy Overview 9.2 Emergency Response Action Guides Development 9.3 Emergency Response Action Guides Time Periods 9.4 Emergency Response Action Guides Directory 9.5 Emergency Response Strategy Exhibit 9.1 Plan Emergency Response Strategy 10.0 PLAN FORMULATION AND IMPLEMENTATION 10.1 Plan Development and Operating Overview 10.2 Plan Development and Strategic Operating Summary 10.3 Crisis Management Plan Organization Chart Exhibit 10.1 Crisis Management Plan Organization Chart 10.4 Crisis Management Plan Task Activities Exhibit 10.2 Crisis Management Plan Task Activities 10.5 Plan Development Project Management