THE RULES OF RISK MANAGEMENT
Design and build a risk management process around these six rules
Several years ago I earned the Certified Risk Manager designation from The National Alliance for Insurance Education & Research. It was one of the best things I ever did, because it helped me go beyond the traditional discussion about insurance coverage, which is to start with cost prevention (safety, wellness), then cost containment (work comp claims management, health care case management) and finally insurance. As part of the course, I was required to memorize the six rules of risk management, which was wise advice.
The six rules of risk management are:
Don’t retain more than you can afford to lose. Example: If your business cannot afford a $100,000 loss, then going without employment practices liability insurance is a bad decision. According to the Equal Employment Opportunity Commission, over 84,000 employment practices actions were filed in 2017. Despite this scary number, roughly seven out of 10 businesses don’t carry EPLI. It looks like we agents have a lot of work to do.
There are things that insurance money cannot change, such as serious injury, disability and death, as well as OSHA fines, lawsuits and damage to a company’s reputation.
Don’t risk a lot for a little. Example: An umbrella is relatively inexpensive compared to the potential cost of a large lawsuit, even one without merit, because it may affect the company’s ability to borrow money to expand. I’m often asked: “How much umbrella liability insurance is enough?” I tell the story of a client who had a visitor to his office slip and fall. The visitor filed a $5 million lawsuit. Fortunately my client won in court and nothing was paid, but the case took two years to settle. During this time the business was expanding and needed bank financing. The good news is that it had a $5 million umbrella, so the bank was willing to lend it the money.
Consider the likelihood of upcoming events and their potential impact. Example: Using a grinder wearing safety glasses but not the face shield seems reasonable until the grinder wheel explodes in your face. Another example is allowing workers to bypass lockout/tagout procedures to save time. This is likely what was happening at Grand Rapids Plastics, which closed its doors in 2016 after its largest customer, Fiat Chrysler, canceled its contract. In 2014, the on-the-job death of an employee resulted in an OSHA investigation, and the company was fined $558,000 for violations. Although no one claimed that the closing was connected to the fatality, it’s easy to connect the dots.
Don’t treat insurance as a substitute for risk control. Example: There are things that insurance money cannot change, such as serious injury, disability and death, as well as OSHA fines, lawsuits and damage to a company’s reputation. On the morning of November 5, 2003, Kristi Fries, an employee at Maverick Metal Stamping, an auto parts supplier now closed in Mancelona, Michigan, reached to remove a part from a 110-ton stamping press. Her unzipped sweatshirt triggered the machine’s controls, causing the press to slam down and crush her arms, resulting in the amputation of both arms below the elbow. The parts to repair the machine had been on a shelf in the maintenance shop for months.
There is no such thing as an uninsured loss; an uninsured loss is a retained loss. Example: If an employee steals $1 million and insurance covers $250,000, then $750,000 is a retained loss. The National White Collar Crime Center estimated global losses from employee theft at about $3.7 trillion. Many corporate security experts estimate that as many as 25% to 40% of all employees steal from their employers. They claim that employee theft accounts for approximately 30% to 50% of all business failures. These retained losses can put a company out of business.
Use at least one risk control technique and one risk financing technique for each exposure identified. Example: A pre-employment physical along with workers comp insurance protects the business if an employee is injured on the job. It also prevents the company from hiring someone who can’t do the work and then gets hurt. Another example is an employer that offers a wellness plans for risk control along with a benefit plan to finance the risk.
Designing and building a risk management process around the six rules of risk management will pay huge dividends by preventing incidents while containing those that do happen, and then providing risk financing though insurance. This will help your clients lower the cost of doing business, which they will thank you for.
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 & benefits. He has over 40 years’ experience and has been at Ottawa Kent for 36 years. He is the co-founder of emergeapps.com, web apps for insurance agents to share with employers. Randy can be reached at email@example.com.