What’s your return on investment?
In my last Small Business Times article, March 15, 2002, I outlined the seven steps to survive an insurance hard market. Certainly by now, the hard market has had an impact on virtually every type of business.
The seven-steps article defines a process that you should embrace no matter what type of market we are experiencing. Those steps represent sound insurance, risk management and business practices. This article is the first of a three-part series designed to help you better understand and implement those seven steps to improve your company and take control of your risk-management program.
Perhaps the most important concept to fully understand is what we refer to as total cost of risk. Total cost of risk is the ultimate financial exposure to a company’s assets. It does not start and end with insurance premiums. It also includes deductibles and uninsured losses. Indirect loss dollars, such as down time, damaged equipment, overtime, and customer satisfaction, should also be factored in to your total cost of risk.
It is important to view your cost of risk in its totality, as indirect costs can range from three to five times the actual losses. If these costs are effectively controlled, you can positively influence your total cost of risk and your bottom line.
Insurance is just one piece of the puzzle. Depending on your company’s size, it could be a very large percentage or a small percentage of your total cost of risk. I like to think of insurance as financing your past and future losses. In other words, if you had a house mortgage, think of losses as your principal. As your principal goes up, so does your mortgage payment (principal and interest). The best way to reduce your principal is to reduce or eliminate losses; reduce your losses and your insurance premium will follow.
Sounds easy enough, right? Actually, it all boils down to one simple concept: establish an effective safety program. From working with hundreds of businesses over the years, I can assure you that companies with a commitment to safety have experienced far fewer premium increases than companies with poor safety programs. Although establishing and maintaining an effective safety program can be challenging, the simple fact is fewer losses equals lower insurance premiums.
The value of an effective safety program is difficult to measure; however, safety is the key risk-management practice in reducing your total cost of risk.
There is danger in becoming complacent and taking an effective safety program for granted when it’s achieving its natural goal of managing your risks. In most every case, an effective safety program pays dividends. If you eliminate or decrease your safety resources, be prepared to incur more losses.
We like to break losses down into three categories: workplace/employees, third-party liability and property/assets. You can impact each of those areas by establishing a strong safety program or improving your current one. Following are suggestions within four major categories of an effective safety program that your company should consider.
Management – Effective safety programs begin with management’s safety philosophy and commitment to creating a safety culture. Controlling costs and the welfare of your employees and the public should be its primary focus. Continuous reinforcement from top management will effectively communicate your company’s commitment to safety.
People – Involving employees in your safety program is the key to its success. Begin with the recruitment of individuals who share your safety philosophies and subject them to drug/alcohol testing. Safety is everyone’s job; however, empowering safety supervisors who are responsible for ensuring a safe workplace will provide focused leadership.
Once you have the right people, you will need to establish a strong and consistent training program. Training should be ongoing, and although annual or semi-annual safety meetings are good, monthly training programs are even better. Depending on the size and type of your operation, you might consider short meetings each week to provide a constant reinforcement of your safety message.
Gaining respect and trust from your employees can be difficult, so recognizing and rewarding them for excellent safety practices is crucial to your program’s overall success. On the other hand, an unsafe employee can be detrimental to your company’s success. Discipline and, at times, termination have to be a part of your safety program as well.
Documentation – This element of your program will not only help protect your business, but it is the best way to communicate and reinforce your message to employees. Start by establishing program goals and share them with your workforce. Written policies, rules and regulations should also be shared and enforced with employees. It is a good idea to post the policies along with the goals in a visible location.
By properly reporting and monitoring employee injuries and accidents, you can minimize the impact on your Worker’s Compensation Experience Modification. Complete reports immediately following an injury or accident and follow the progress of your claim with the adjuster. You can minimize total claim costs by controlling the medical expenses and providing an early return to work program.
Inspect and improve – Conduct regular inspections to identify hazards and/or problem areas within your organization. Form a team composed of safety supervisors and management who have the experience to identify dangers and have the resources and authority to correct them immediately. This is extremely important because, as stated earlier, it’s easy to become complacent once you have developed a strong safety program.
Remember, no matter what insurance environment we’re experiencing (hard or soft market), reducing your losses always improves your bottom line. Look at your safety expenses as an investment. Your return on investment will vary from year to year. In light of your total cost of risk, you will find your safety program is a necessary investment that will provide a valuable return.
Be sure to look for the remaining two articles in this series in upcoming issues of Small Business Times. In the next article, I will explore ways to take control of your insurance costs and explain "The Risk Hierarchy" concept and how to create the Ideal Insurance Program. The final article will be a culmination of the theme of this series, strategic risk management, specifically regarding the agent/broker selection process.
Mike Natalizio is president of HNI Company, Inc., an insurance broker located in New Berlin, providing insurance, risk management, and loss-control services to businesses; www.hni.com.
July 5, 2002 Small Business Times, Milwaukee
