Improve performance and stabilize premium costs
April 2013 - Most executives of metals companies, particularly finance executives, prefer to have the greatest level of predictability when managing the cost components of operating their business.
Planning and budget forecasting is more effective when costs can be stabilized over longer segments of time. Property and casualty insurance, which encompasses coverage for buildings, equipment, automobiles, employees and executives, is an expense line that if not properly managed can create significant pricing spikes and compromise budgets, planning and overall profitability for a metals company.
Risk transfer can drive premium mood swings
In typical insurance transactions, a metals company would pay an annual premium for a policy (such as workers’ compensation coverage) and transfer 100 percent of the risk to the insurance carrier. The carrier then takes full liability for payment of losses for the coverage provided during the policy period or terms within the policy.
This can be an effective way to manage an insurance program but it also can be an unpredictable method from a premium cost standpoint. Traditional insurance programs are subject to far greater pricing mood swings than alternative risk solutions and typically are tied to the performance of a broad group of companies insured by the carrier, as well as to the broader global market, the cost of reinsurance, the investment return of the carrier and other key pricing contributors.
When unfavorable conditions manifest in any of the key cost contributors, traditional insurance programs often experience changes in premium rates. Also, availability of coverage may be reduced appreciably in the traditional marketplace, creating instability in cost forecasting and inadequate loss protection.
Risk assumption can create pricing stability
One of the greatest ways a metals company can mitigate insurance premium market mood swings is to assume risk. Assuming risk is, in essence, indirectly correlated to transferring risk in a traditional insurance program. An excellent option to assume risk is to participate in alternative risk programs. Alternative risk programs provide for risk participation between the metals organization and the insurer or reinsurer.
Common alternative risk programs are
Large deductible plans— a metals company is responsible for a certain deductible level on each claim or claim event.
Captive insurance programs—a company is an owner or renter of an insurance company and retains a certain amount of a claim or claim event. Claims are paid from a funded loss account, and profits are distributed back to the company.
Risk retention groups—a pool of members form an insurance company and assume claim risk. Members/owners are generally from the same industry.
Self insurance— a corporation assumes all claim liability and may secure reinsurance. Company may manage its own claims.
Self-insured groups—companies that pool premiums and pay claims as a group. Generally secure reinsurance (catastrophic claim insurance).
Retrospective rated plans—program costs reconcile with individual claims and aggregate losses in a policy term.
Alternative risk programs typically are contractual agreements with performance metrics outlined. They directly connect a metal company’s insurance program costs with its own loss performance. Instead of transferring the entire risk to the carrier, a metals company retains a portion of the risk. In doing so, it creates a risk/reward equation. Generally, the company knows its minimum cost liability and its maximum cost liability are for a given policy term. There are nuances to program structure, and aside from pure self insurance, a company participating in an alternative risk plan does not have unlimited cost liability.
The benefits of company participation in alternative risk programs are program cost improvement for good performance (possibility of sizeable retained earnings); predictable premium modeling because costs are more aligned with loss performance; insulation from volatile premium fluctuations; greater focus on risk management, which improves direct and indirect costs; and potentially significant cash flow and cash management advantages.
Mark Blaisdell, controller, McNeilus Steel, Dodge Center, Minn., comments, “We participate in a metals-related captive insurance program, and our recent renewal on liability, auto and workers’ compensation was flat. We understand the traditional market is seeing 5- to 20-percent increases in many areas. In addition to preferred pricing, we have the ability to return a majority of the premium from our good results.”
Dividend plans are not risk bearing and insurance carriers cannot guarantee a dividend distribution. A distribution is at the discretion of the board of directors of an insurance carrier and might not be based on individual participant performance. MM
CAPITALIZE ON THESE FACTORS
There are key methods to extract the best cost performance from your insurance program and to sustain favorable, more predictable results over time. Assuming quantifiable risk can be an excellent way to improve insurance program performance and to stabilize premium costs.
• Develop an annual action plan for safety.
• Focus on engineering out hazardous conditions before using training, special procedure or protective equipment as a solution.
• Measure safety activities, results and goals and share the information with all levels of the organization.
• Hold managers and supervisors accountable for loss performance through the performance review process.
• Evaluate loss trends and take corrective action.
• Aggressively and proactively manage all claims and the return-to-work process.
• Ensure senior management is visible and shows support for safety activities.
• Empower and engage employees to openly discuss safety hazards and issues.
• Teach leaders to lead. Educate leaders so they are comfortable with safety training.
• Break safety training down into manageable tools and topics.
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