Principals of Risk Management and Insurance

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					             risk management
                                                                                                                 e      about the author

                                                                                                                     Brent Moody is
                                                                                                                     an underwriter
                                                                                                                     for nBIS
                                                                                                                     and transport

    risk tolerance principals can successfully
                                                                                                                     Inc. He is a
                                                                                                                     member of the

    be applied to your company’s risk management
                                                                                                                     casualty team with a focus
                                                                                                                     on the transportation and

    program. Brent Moody reports
                                                                                                                     specialized hauling industry

    Assessing risk
         he concept of risk tolerance is nothing      approach would be the loss of revenue that        of risk retention is levels of loss over and
         new to us. When we think of risk             could have been gained from providing             above what is insured. For example, if a
         tolerance, our thoughts usually shift        welding services. This is an almost daily         company carries $5 million in limits on
    to the fascinating world of diversified           process for the decision makers in any            their general liability policy, the company is
    portfolios, 30-year treasury bonds, 401ks,        organization as potential risk/reward             retaining any loss(es) over $5 million.
    and Charles Schwab commercials. General           opportunities are constantly being analyzed       rISk trAnSfer: Here’s where the insurance
    rules regarding risk tolerance when it comes      and evaluated in order to determine the           comes in. An organization pays a premium
    to investing have changed very little over the    future direction that a company might take        to transfer all or part of the risk they could
    years as they hold to a simple yet very logical   down the road.                                    potentially incur over to an insurance
    principal: Your current position should           rISk redUCtIon: The two issues being              company.
    dictate your current approach to investing        addressed here are loss frequency and
    and thus your position with regards to risk       severity. You are either trying to reduce the     The right mix
    tolerance. If you are young and single with       overall likelihood of an accident occurring       The majority of risk management programs
    no children, you can afford to take a riskier     (frequency) or trying to reduce the impact        utilize parts of all four approaches. The key
    alternative with your finances. You can hit       that results if a loss does occur (severity). A   is to pick the right mix in order to maximize
    and miss with minimal consequence.                decision might be made to install governors       your coverage while doing so in the most
      On the other hand, if you are nearing           on all tractors in an effort to reduce the        cost-effective manner possible. Let’s focus
    retirement with two kids attending out-of-        number of claims attributed to speeding.          on risk retention and risk transfer to see
    state universities, your risk tolerance often     Many companies outsource this aspect as           how to best approach the two strategies.
    diminishes significantly or maybe even            there are a number of organizations that          Generally, the more risk you retain as a
    disappears entirely! Hitting and missing          specialize in implementing risk reducing          prospective insured, the less risk you will be
    is no longer a viable option. Any financial       technologies and practices in the most            transferring to an insurance company, which
    advisor will tell you that assessing your         cost-effective manner possible. This gives        translates into lower premiums for coverage.
    current risk tolerance level is essential to      companies the ability to focus on day-to-         The obvious question to ask yourself is the
    making the right decisions to achieve your        day operations and business development           same one your financial advisor asks: How
    financial goals.                                  while simultaneously having risk reducing         much risk are you willing to take on? Some
                                                      strategies integrated into the organization.      key items to keep in mind when working
    risk exposure                                     rISk retentIon: Put simply, this is               through this are as follows:
    Although the objectives are different, the        accepting and paying for a loss when it             What is your worst case scenario? What
    principle of risk tolerance should also be        occurs. The best example of risk retention        you are looking for here is the ultimate
    utilized when approaching one’s current           would be risk associated with war. The            Doomsday situation. If everything that
    risk management program. The textbook             vast majority of insurance companies              could possibly go wrong goes wrong, what
    definition of risk management states              attach policy exclusions for losses resulting     dollar amount could be at stake? Of that
    that there are four ways to deal with risk        from war. This is because the potential           amount, how much are you willing to take
    exposure.                                         catastrophic nature of war from an                on? If you think your worst case scenario
    rISk AvoIdAnCe: This is simply not                insurance standpoint is so great that carriers    would fall in the $15 million range and
    performing any activity that has risk             do not have the capacity to insure against        you currently carry $10 million in limits,
    associated with it. For example, an owner         them. Even if they did, the premiums that         your organization is retaining $5 million
    might decide that the risk of performing          would be assessed for the coverage would          in potential claimant payments. Is your
    welding services for clients is too great         be astronomical anyways. In this case, the        organization prepared financially should the
    and cease conducting that type of work in         policyholder is retaining the risk of loss        unthinkable happen? Staying with the prior
    the future. The obvious downside to this          resulting from acts of war. Another aspect        example, if your current position dictates
42 American Cranes & transport march 2009
   about the author                                                                  risk management                                            

a higher threshold for risk retention, you       Ability to “weather” fluctuating market        of bureaucracy that usually goes hand-in-
might decide to only purchase $5 million          conditions: When the market is soft, the       hand with the claim process.
in limits if the chances for Doomsday             captive can decide to reinsure a larger       In the future, take some time to review
seem highly unlikely and your company is          portion of the risk to take advantage of    your current insurance program with your
prepared if things did “hit the fan.” On the      lower rates. When the market hardens,       agent. While it’s probably not too high on
other hand, if assuming any part of a worst-      the captive can retain a larger portion     your list of priorities, it is vital to ensure
case claims scenario is not an option, the        of the risk in order to keep costs to a     that you and your business have the best
immediate cost of purchasing higher limits        minimum.                                    possible protection available. Assess your
could be a worthwhile expense to ensure that     A portion of the cost associated with       company’s prior loss history to see if a higher
your company has the protection it needs.         standard market insurance premiums          level of retention would make sense. Analyze
  What has your loss experience looked like       is allocated to an insurance company’s      your company’s current position to see what
over the past 3-5 years? Review your claim        cost of doing business. With captive        level of risk you are comfortable with. Take
history and look for any trends. Let’s say        programs this essentially becomes a non-    advantage of various retention options out
you notice a number of small claims that          issue. The savings are passed directly to   there to cut down on insurance costs if it
fall within the $1,000-$5,000 range. You          captive members.                            makes sense for you. Ask your agent about
might want to work with your agent on            Claims handling is typically directed       a captive program. Insurance is a necessary
implementing a deductible or self-insured         by management which results in fewer        tool for doing business. You might as well
retention program.                                delays in the handling process as well as   take the time to be sure your company is
  The upside to this type of program is           drastically cutting down on the amount      operating with the right one.             act
two-fold. The obvious effect will be
lower insurance premiums since you are
now taking on a portion of all incurred
losses. Secondly, you have implemented a
risk management strategy that creates an
incentive for your employees to operate
in a safer manner in order to reduce claim
frequency. A key consideration here will
again be to assess a worst case scenario in
terms of the number of claims that could
be incurred. If you are considering a $5,000
deductible and you have average 25 claims                     SUPERIOR SAFETY BY DESIGN!
a year, you could potentially be looking at
$125,000 in deductible payments! Once
again it comes back to assessing what
degree of risk you and your organization
are willing to take on.
Insurance captives
Let’s look at one final combination of risk
retention and risk transfer that places a
large part of potential claim payments into
the hands of the organizations. Insurance
captives come in a variety of types with the              Our Flat-Top Modular Design makes for the
group captive being the most commonly                    safest erection and dismantling in the Industry.
utilized in the commercial lines sector. A
group captive is owned by a number of
participating companies (its members)
and provides a number of advantages
over the standard insurance market while
still satisfying the insurance needs of its
members. Captives generally consist of a
substantial portion of the overall risk
being retained by the members with the
remainder being reinsured. Premiums are
generally assessed to members based on
individual company size as well as prior loss
experience.                                             CALL LCA TODAY TO FIND OUT WHY!
  There are a multitude of variations to
captive programs but generally any
premiums in excess of claims for the current
year are retained by the group essentially
placing each member in control of their
respective insurance destinies. There are a
number of advantages to captive insurance                         Toll Free: 1-800-589-7980 • Office: 704-588-7729
programs not limited to the following:                                 Fax: 704-588-3986 •

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