By Randy Boss, CRA, CRM, MWCA, SHRM-SCP
FLIPPING THE PYRAMID
Containment first … insurance last
“The definition of genius is taking the complex and making it simple.”
Our world has changed a lot since I started my insurance career in 1977. That was the year that Apple shipped its first Apple II computer. There were no cell phones or fax machines. Correspondence was by landline telephone, and we typed letters on a typewriter. The dictionary was our spellchecker, and Wite-Out (sometimes lots of Wite-Out) was our backspace.
If someone needed something fast, I would get in my car and drop it off. There was no GPS, so I carried a Michigan map and a few county maps for reference.
Today we have so much knowledge at our fingertips that it can be overwhelming to decide what to apply. We live in a society of instant gratification, not long-term rewards. Take smoking, for example. Smokers know it will most likely cost them years off their lives, yet they choose the short-term gratification of a cigarette over the long-term health benefits of living longer. The same is true for individuals who overeat. They choose the short-term gratification of a hot fudge sundae over the long-term benefits of a healthy lifestyle, and they dismiss the few pounds gained that can lead them down the path to becoming overweight, which will have a negative impact on their health.
We rely too much on insurance instead of reducing and controlling risk.
Businesses do the same thing when they choose profits over safety. Because it takes valuable production time to consistently perform a lockout/tagout for machine maintenance, some businesses cut corners. No one pays attention until someone gets injured or killed.
Billions are spent annually to help those with a health crisis brought on by years of bad habits and lack of concern for safety. We rely too much on insurance instead of managing and controlling risk.
Explaining risk management and insurance can be challenging. While they may seem simple to insurance industry veterans who live and breathe them every day, the concepts and vocabulary can seem like a foreign language to others.
I get my best ideas while I’m exercising. One morning during a two-mile run, I was thinking about how to explain the benefits of managing risk and its effect on insurance without having the client check out mentally; at the same time, I was using terms like “concurrent causation” and “Bayesian probabilities.” That’s when it hit me, and I created the concept of “flipping the pyramid.”
The traditional insurance pyramid has three layers. The bottom layer is insurance, the middle layer is cost containment, and the top layer is cost reduction. It’s time to flip the pyramid by starting at the top with cost reduction and ending at the bottom with insurance. By doing this, companies and individuals can prevent incidents that cause poor health, disability, and premature death. The result is a dramatically safer workplace with healthier, happier, and more productive employees, as well as lower insurance costs and a healthier bottom line. Let’s see how it works.
Cost reduction. Start with strategies like safety and wellness, which can yield best-in-class results. Insurance is about financing risk, but you don’t need to contain cost or transfer to insurance the incidents that were prevented. Prevention starts with protecting employees and business property.
A lot of risk in the “people bucket” gets overlooked. Look at healthcare. Why is it that an employee starts at a company in their 20s in perfect health but leaves in their 60s a wreck, with all kinds of medical issues, without their employer lifting a finger to influence healthy habits? One method we have used is a program called Points Passport, which rewards employees with lower benefit premium contributions if they do two simple things: get an annual physical and blood work. It seems simple, but you would be amazed by how many people don’t do this until they get sick and it’s too late.
To prevent property claims, do a property walk-around with an insurance company’s loss control representative. Have them make a list of recommendations and support them in getting the identified corrections made.
One of my first jobs was working in a food processing plant. Unfortunately, it had a devastating fire that put the plant out of business for over a year. The investigation revealed to the fire marshal that a fryer caused the fire. Years later, I talked with an insurance company loss control representative. He told me that he had done the inspection at this plant and identified that specific fryer as having a defective temperature control system. He reported it to the underwriter, who informed the agent. Because it was a costly fix, the client refused, and the agent went back to the insurer stating they might have to move the account if they pressed the issue.
This was a large account, the hazard was ignored, and a fire destroyed the plant just two years later. The insurance company suffered a huge loss. As a result, the client left the insurer and the agent after the plant was rebuilt because it was not satisfied with the advice given before the loss.
Cost containment. Near misses are known indicators to future incidents. Stuff happens and when it does, the fallout will be minimal if a process is in place to contain costs. An example is when an employee is injured at work. The employee receives treatment from the family doctor, who orders him or her off work for six weeks, which triggers a workers comp claim for medical bills and lost wages. An effective cost containment strategy is to have the worker receive treatment at an occupational medical center chosen by the employer. You want a doctor who is trained to handle the kinds of injuries that are commonly experienced by the employer’s team members and one who knows that the employer has a robust return-to-work process.
This way, the injured employee can return to work with reasonable restrictions, recover more quickly, and trigger a claim for medical benefits only.
Insurance. This should be the last tactic considered after cost reduction and cost containment strategies are in place. It’s been my experience that if an agent can demonstrate robust cost reduction and cost containment strategies, an underwriter will reward a business with lower rates and more stable pricing. It’s also important to note that not everything can be fixed with cost containment and insurance, such as a disability, death, or lack of compliance.
I love having the “flipping the pyramid” conversation with my clients and prospects. It’s effortless to illustrate how focusing on prevention first and insuring last is the best way to protect people, property, and the very survival of a business.
Randy Boss is a Certified Risk Architect at Ottawa Kent in Jenison, Michigan. As a Risk Architect, he designs, builds and implements risk management and insurance plans for middle market companies in the areas of safety, work comp, human resources, property/casualty and benefits. He has over 40 years’ experience and has been at Ottawa Kent for 38 years. He is the co-founder of emergeapps.com, web apps for insurance agents to share with employers. Randy can be reached at firstname.lastname@example.org.