The days of SALY - same as last year - are long gone.
In a perfect world, the elements of a risk management strategy would come together to create a sustainable, strategic and administratively efficient risk financing program that protects the insurance income statement, optimizes its use of risk-based capital, minimizes the use of insurance and reduces collateral requirements.
Yet the world, particularly when it comes to risk, is not perfect. Risks change, evolve, emerge, intensify and can appear with little warning. That is why developing and working a solid risk management strategy is essential.
That means challenging everything you do. Everything that needs attention should not be measured by what was done last year, nor on what is being done this year. Instead, risk management needs to be an evolutionary process - a quarterly, monthly, weekly, even daily exercise that becomes part of your company genetics.
To do that, your company should be reviewing the five pillars of retained risk, and knowing how to align those pillars into a comprehensive, cohesive risk management strategy. It also means knowing your fixed and variable expenses and your ability to sustainably and measurably impact those expenses.
Areas companies focus on and the impact on expenses include:
- Broker fees: Lowering fees has some impact on expenses, but not a measurable one '” nor is it necessarily sustainable.
- Insurance premiums: As any hard market will prove, premium pricing has little sustainable impact on expenses. Risk management efforts are welcomed, but not necessarily going to reduce the price.
- Retained risk: The only real expense companies have control over that can have a major impact on the bottom line
The Five Pillars
Retained Loss
In fact, retained risk, or retained loss, is a controllable variable in many ways, and you can employ controls that manage retained risk costs. It starts with a focused alignment of your internal metrics to achieve the desired outcome.
To do so, companies need to align claims management metrics and review them regularly. From there, companies can establish actuarial, alternative risk, application of experience models and other assessments and programs to better control those retained losses.
Claims Management
That’s where alignment within claims management can also impact pricing. Aligning safety, loss control, actuarial and analytics means removing any silos between these areas, and revamping them to be more forward-looking. Real time monitoring identifies issues before they have time to manifest into costly risks.
Technology can speed the monitoring of claims management and can improve response time and help companies anticipate probable losses. Close monitoring is one of the best solutions for keeping claim costs in check.
Risk Transfer Premium
Technology can deliver much-needed data. In fact, getting the lowest possible cost and improving the risk management strategy depends on data. Fact-based broking that includes the active participation of executive management appeals most to underwriters. From a safety and loss control perspective, a company in which direction and execution comes from the top makes underwriting decisions easy.
So does pre-pricing risk. Determining a likely price helps companies determine their success level, so that when the underwriting price comes in, they can get an idea of how well their internal efforts align with what underwriters see. It can also help companies understand if they are getting the proper credit for the risks that are retained.
Cost of Collateral
Since collateral is secured, those costs must be factored into any strategy. Depending on factors unique to your company, there could be ways to reduce collateral costs. For example, an NFP insured's two big collateral drivers are auto and workers’ comp. Since a majority of the insured’s WC exposure is in California, we suggested they become a qualified self-insured entity in the state. From there they could participate in the Alternative Security Program (Managed by the California Self-Insurers Security Fund
(SISF), which would significantly reduce their collateral obligations eliminate go-forward collateral charges in CA. NFP is currently exploring the benefits of becoming a California-qualified, self-insured entity for auto as well.
Risk Charges
In much the same way, companies can reduce their risk charges by identifying internal cost of capital, including the hurdle rates associated with that capital and devising ways to reduce the risk.
That does not mean focusing on premium. Instead, companies should integrate all of these pillars into a comprehensive risk strategy. To truly reduce expenses through risk management, companies should pay attention to how these pillars are presented to the insurance marketplace and how they are measured and monitored internally.
Redirecting Focus
With a fundamental shift in how companies identify their approach to expenses – and how they mitigate those costs – a sustainable, measurable impact can emerge. The laser-focus on premiums can breed a false and misdirected sense of security.
What’s needed is a broader, wholistic approach to risk management. Companies can achieve this by incorporating retained loss, claims management, risk transfer premium, cost of collateral and additional risk charges into the risk management strategy. This more inclusive approach can pay off with better control of risk and a more sustainable portfolio over time.
NFP’s Property & Casualty Services are adaptable and incorporate elements of risk transfer and risk financing that meet the unique needs and log-term goals of our customers. Find an NFP Professional to discuss tailored risk management services.