IRMI Update—Issue #64

An E-mail Newsletter for Risk and Insurance Professionals
ISSN: 1530-7948
May 6, 2003

In This Issue

Message from the Editor

Colleague,

A major concern—indeed a major risk—for all of corporate America is the capabilities of its future workforce. As baby boomers age and begin retiring, many companies will lose an incredible amount of knowledge and experience. Like most other industries, this is a major concern for the insurance industry. Layoffs, downsizing, and cuts in training and education programs have left the industry extremely vulnerable. The only way to manage this risk is to bring young people into the industry, provide excellent training to all workers, and give them access to the information they need to be successful.

Fortunately, the insurance industry may be responding to this problem. There seems to be a considerable increase in interest in and emphasis on risk and insurance education at insurers, agencies, and brokerage firms. We've noticed a number of developments that may point to this trend. Here are a few examples.

The business of insurance is one that requires true "knowledge workers," and the companies that invest in their people will be the future winners. I hope the industry continues to hire more risk and insurance majors and encourages them to obtain CPCU, IIA, CIC, or RPLU designations. I also hope that insurance executives are rethinking their past decisions to deemphasize internal training programs.

True, my evidence is anecdotal, but it seems to be pointing in the right direction. What do you think? Has the industry received the wake-up call it needs? Is your organization hiring young people? Are they being provided the training they need to become top-notch risk and insurance "knowledge workers"? [See reader comments.]

Speaking of training, I'm delighted to announce that we are going to hold our seminar series "Captive Insurance Solutions for the Middle Market" one more time in three cities. Nearly 500 people have now attended, and they gave the program rave reviews. If you are thinking about starting or participating in a captive or risk retention group, attend this seminar. Learn more on this web page.

Thank you for your support. Have a great day!

Jack

Jack P. Gibson
President
IRMI

Risk Tip

Implement Enterprise Risk Management Concepts—Many companies are considering enterprise risk management concepts but are quickly overwhelmed with the range of issues they need to consider. Here are a few simple ideas to get things started.

  1. If you are a public company, begin by asking the person or group that identifies risks for SEC reports to also identify the top three corrective actions for the next quarter. Update the list quarterly.
  2. Ask your insurance brokers for a list of exposures. They should be able to provide you with information about insurable risks and non-insurable risks.
  3. Hold a meeting with representatives from human resources, legal, operations, finance, and sales to identify overlapping areas of responsibility and gaps. Typical examples include contract review, credit management, information technology, employee safety, and acquisitions. Develop processes for managing overlaps.
  4. If your company has formal quarterly or annual objectives, ask each employee to identify the risks that could block implementation and to include risk mitigation strategies.
  5. Coordinate the development of a business continuity plan with an enterprise risk management review. In both cases you need to focus on the areas of greatest potential loss.

Many formal approaches can be used to categorize, prioritize, and implement risks but one of the fundamental requirements is cross-departmental communication. The above measures will help to establish a foundation for future action.

By: John Schaefer
VP-Enterprise Risk Management
ABD Insurance and Financial Services
Redwood City, CA
E-mail:
www.cybersure.com

Suggest a Risk Tip. Future issues of IRMI Update will include more risk tips from our readers. Send us a practical tip (less than 300 words) for identifying and managing risks, buying insurance, managing claims, or filling gaps in insurance coverages. We'll give you credit for your contribution.

Correction to IRMI Update 63

In the "New Expert Commentary" section of IRMI Update 63, the following links were incorrect. Below are the correct links. We apologize for the error.

New Expert Commentary

There are now 413 articles on IRMI.com, and many more are in production. Below you'll find summaries of some recent additions with links to the articles.

New IRMI Insights

Cell Phone Bans for Drivers: Wise Legislation?—Robin Olson examines the research studies surrounding the issue of cell phones and driving. Since the conclusions rarely agree, he feels legislation banning cell phone use should wait until uniform data can be collected to accurately assess the problem.

IRMI Construction Risk Conference

Sign Up To Get the Conference Brochure—The 23rd IRMI Construction Risk Conference will be held November 17-20, 2003, in Chicago. If you are not on our mailing list and would like to receive a printed brochure, please e-mail your complete name and postal address to contact us and ask to be added to the Construction Risk Conference mailing list. Brochures will be mailed in late July. Early registration is advised as our room block in the Conference hotel always fills up quickly, and some workshops may close out early.

Featured Expert Commentator

Doug Berry of Butler Pappas Weihmuller Katz Craig LLP provides a legal perspective on property insurance coverage for IRMI.com. An IRMI.com expert commentator from its inception, he provides concise, current summaries of what the courts are ruling on property issues such as windstorm, business interruption, and specific policy term interpretation. Mr. Berry's practice focuses on litigation of first- and third-party coverage issues on behalf of insurers throughout Florida and elsewhere in the Southeast. For more information on Mr. Berry, go to following links to see his full biography and a list of his articles.

Your View—When Is a Full-Time Risk Manager Justified?

In IRMI Update #63, Jack mentioned the oft-cited rule that a full-time risk manager should be able to save an organization at least 10 percent of its insurance premiums and retentions, and full-time staff should be hired when these costs reach a level to fund it. We received many comments from readers regarding this theory, and edited versions are reproduced below.

—Darrell Teague, Corporate Risk Manager

My company hired a risk manager when they decided that the job was too big to be handled on a "part-time" basis by the Treasurer. Essentially, this was when the worldwide sales reached about $500 million and the organization became truly worldwide. These would not be parameters for all companies. It really depends on the amount of activity assigned to the risk manager. We are a generic pharmaceutical and animal health business and have issues unique to those industries that drive risk management activities. Retail stores, for example, have an entirely different risk profile and would need to make the decision differently—maybe based on the number of stores. It also depends on the tasks that are/would be/could be assigned to the risk manager. The scope of my job has grown dramatically. This growth is due, in part, to the growth of the company but is also due to the involvement of risk management in more and more aspects of the business.

This Risk Management Department is involved in (in addition to financial analysis and planning): product liability claim management (including litigation), product selection for the "pipeline," contract review, property conservation, environment, health and safety, business continuity planning, etc. The common thread to all activities is the ability (or inability) to finance risk through the use of insurance and the minimization of such risk.

I think that a professional risk manager is needed when risk control and issues become too large for a single professional to do "in their spare time."

—Mary B. Andrews, CPCU, Senior Director of Risk Management, Alpharma Inc., Ft. Lee, New Jersey

  1. Evaluation of Management/Owners in terms of how they value the business they are operating.
  2. Analysis of the percentage of employees who produce the greatest annual revenue.
  3. The analysis of total revenue in relation to cash flow parameters. Generically speaking "Management," "Personnel," "Contingencies."

—Samuel T. Williams, President, Professional Economic Counselors, Inc., Frederick, Maryland

  1. What type of business is the company involved with? This goes to exposure. Obviously, the higher the exposure, the more need for a risk manager. Some exposures of concern would be petrochemical, paint, food, distribution and fleet, healthcare, manufacturing of equipment/parts, LPGs, entertainment parks, etc.
  2. Risk managers do more than place insurance. A company could start with a risk manager that has experience in not only insurance negotiations/placement, safety, claims, contracts, policies and procedures, etc. Benefits could be added also. But there is enough work to justify a good full-time risk manager to do the types of things that need doing to better manage the company's exposures in order to mitigate loss, manage the loss if a loss occurs, and to avoid loss.
  3. Managing claims/litigation even when a TA is being used is an important aspect of risk management. Setting guidelines, writing contracts so there can be more involvement in TA's decisions, writing Litigation Management Guidelines, and then monitoring the defense panels and TAs, etc.

A good risk manager, in my opinion, generates work processes, work flows, policies, and procedures. As the work develops and the company grows, then comes the justification to add additional staff. Always, there should be at least a risk manager.

—Mary J. Dilley, County of Riverside, Human Resources Dept./Division Risk Manager, Riverside, California

—Marvin Sahl, Risk Manager, Selected Master Franchises of Jani-King, Palm Springs, California

A few months later an employee was replacing filters in the spray booth (custom built, but very nice). Meanwhile, another employee was using a hand grinder just outside the booth to do some last minute clean up on parts that were about to be sprayed. A stray spark hit and ignited the exposed filters and the fire took off—as you might guess, the building was basically a total loss. On the bright side, their property coverage was excellent; unfortunately after a couple weeks of initial clean up and talking to some construction companies, they determined that they could have the building rebuilt just in time to file bankruptcy. They opted to take an ACV settlement on the property and close their doors.

Risk management should be viewed as a business necessity. It's nice when the risk management operations can pay for themselves via cost savings, but the ability to generate a positive ROI should not be the sole determinant. In the case I described, we (the insurer) did reinspections every 2 to 3 years. On the day we were there, no grinding was taking place near the spray room. A full-time risk manager is present every day, and is much more likely to see potential problems that occur during the course of normal business activities—and take steps to correct them.

Obviously any business must look at whether or not it can absorb the expense of a full-time risk manager; and you outline some good rule-of-thumb guidelines. But the benefits of an effective risk management program go well beyond the scope of what is covered by the insurance contract. The value added is often difficult to quantify—but nonetheless essential.

One final thought, an integrated risk management program allows a business to budget more effectively by having a base fixed cost of risk management, the risk manager, and by minimizing the uncertain costs of risk (losses, fines, etc.) that may have not been identified without a full-time risk manager on staff.

—Gregory Altsman, Supervisor - Corporate Learning Department, Erie Insurance Group, Erie, Pennsylvania

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