Managing Risk & Insurance Costs What Are Your Options? Truckload Carriers Association 2004 Annual Conference By: Terry Burnett Burnett Insurance Corporation Little Rock, Arkansas
I. Risk Management Components A. Risk Identification 1. Property 2. Human Resources 3. Liability 4. Net Income 1. Building, contents, computers, trucks, freight handling equipment 2. People both inside and outside the organization 3. Vehicles, contracts, employees, premises 4. Anything that affects the bottom line lose a customer, fuel cost, weather conditions, equipment devaluation, interest rate
I. Risk Management Components B. Risk Analysis 1. Qualitative Analysis (WHAT) 2. Quantitative Measurement (HOW MUCH) 1. a. Review & categorize exposures b. Identify frequency & severity patterns c. Develop assumptions, alternatives, options d. Weigh contract & compliance issues 2. a. Quantify exposures b. Project losses forecast payouts c. Determine total cost of risk Loss Projection Tools: Triangulation Fully developing loss data Regression analysis - Trends or Patterns Standard deviation factors Inflation factors
I. Risk Management Components C. Risk Control 1. Avoidance 2. Prevention 3. Reduction 4. Segregation (Separation) 5. Physical Transfer 1. Stop doing whatever creates the exposure (stop hauling computers) 2. Safety and loss control measures (special procedures) 3. Reduce the amount of exposure (product, credit risk) 4. Implement multiple locations (dock, equipment, parking) 5. Transfer to someone else (3 rd party services)
Stanford Hazard Index Probability 1. Remote 2. Low 3. Moderate 4. High 5. Probable Severity 1. Slight 2. Appreciable 3. Serious 4. Severe 5. Catastrophic Score of 1 4 Institute corrective action if and when appropriate Score of 5 9 Initiate corrective actions when practical Score of 10-15 Institute all reasonable corrective action ASAP Score of 16-25 Immediate corrective action must be taken
I. Risk Management Components D. Risk Financing 1. Retention 2. Transfer 1. Absorbing the cost a. passive (no plan) b. active (plan for self-funding) 2. a. Insurance policies b. Contractual transfer of risk
Retention vs. Transfer S e v e r i t y Transfer Retain Frequency Except in a very soft market, insurance is priced on a cost plus basis with expenses plus profit around 30%. Low severity should be retained to eliminate insurance company profit and expenses on the losses within your retention level.
Total Cost of Risk A. Property and Liability Insurance B. Retained Property and Liability Losses (passive and active) 1. Deductibles 2. Uninsured Losses C. Risk Management Department Costs D. Outside Services 1. Claims Administration 2. Safety & Loss Prevention E. Loss of Productivity 1. Utilization 2. Opportunity 3. Quality of Service
II. Managing Risk A. Commitment 1. Written policy 2. Immediate cost vs. long term savings 3. Gross revenue vs. bottom line profit 1. Know the answer before the question is asked. 2. Must be willing to invest now for long term benefits. 3. Some RM practices will hinder revenue, but help improve profit.
II. Managing Risk B. Operations 1. Areas traveled 2. Commodities 3. Delivery schedules 4. Driver relations/morale Does the revenue justify the risk? Traffic density, crime rate, juridical climate Hazardous or clean-up problems, perishable, easily damaged, theft target, manual loading Unrealistic timeframe Are drivers allies or adversaries?
II. Managing Risk C. Loss Prevention 1. Steadfast procedures & requirements 2. Orientation/training process 3. Annual review/training 4. Post incident training 5. Established disciplinary procedures 1. Get your story straight & stick to it. 2. Make sure the employee knows what is expected. 3. Let the employee know how he is doing. 4. Strive to prevent reoccurrences 5. Take the emotion and economics out of it.
II. Managing Risk D. Claim Management 1. Investigate every claim 2. Demand accountability 3. Subrogate aggressively 4. Review claim reserves quarterly 1. Determine cause and try to prevent in the future. 2. Make certain adjusters are doing their job. 3. Actively work to reduce cost of risk. 4. Question reserving practices.
III. Managing Insurance Costs A. Factors That Affect Premiums 1. Location (L.A., Omaha, Memphis) 2. Equipment type (flat, dump, van) 3. Commodities (Hazmat, perishable) 4. Losses (frequency or severity) 5. SafeStat Scores 6. Financial Condition (D&B, C.A.B.) 1. Metro area rates can be double rural area rates. 2. a. Flats are sometimes surcharged b. Dumps are prohibited by many underwriters c. Companies that write short haul dumps won t touch long haul and vice versa. 3. High value loads, theft target items, perishables, hazmat. 4. a. Adverse loss history b. Frequency of >25% 5. a. D & B Report b. C.A.B. rating Most insurance companies subscribe to C.A.B. Satisfactory Excellent Financial Structure Fair Adequate Financial Structure Barely Fair Limited Financial Structure Unsatisfactory Inadequate Financial Structure Dangerous Distressed Financial Structure
III. Managing Insurance Costs B. Improve The Submission Process 1. Start early 2. Build a company profile 3. Compile current and accurate data 4. Provide details of large claims 5. Assign specific markets 1. Complete submission should be in the hands of underwriters 60 days prior to renewal. 2. Learn to tell your story effectively. Include corrective action. 3. Make sure underwriters have what they need to underwrite. 4. Minimize the impact of abnormal losses. 5. Don t allow a free-for-all in the marketplace.
III. Managing Insurance Costs C. Coverage Analysis & Selection 1. Determine your appetite for risk a. Underwriter stability b. Deductible amount c. Claim handling d. Uninsured exposures / Policy exclusions a. Best s rating financial strength b. Willingness to accept financial uncertainty c. How do they handle claims? d. Are you willing to accept the financial risk?
III. Managing Insurance Costs D. Coverage Analysis & Selection (cont d) 2. Retention vs. transfer cost a. Collateral requirements b. Payout Timeframe c. Deductible Analysis a. Deductibles & retentions require security in the form of cash or L.O.C. b. Deductibles are paid after claim is settled which could be months or years down the road. c. This allows you to compare the cost.
Deductible Analysis Year 00 01 02 03 Total 42,000 25,000 16,000 60,000 $1,000 to $10,000 143,000 Annual Miles 2,000,000 2,500,000 3,000,000 3,500,000 11,000,000.210.100.053.171.130 Factor Projected miles for 2004-4,000,000 Projected Deductible Payout (miles x factor) = $1,000 deductible quote = $225,000 $10,000 deductible quote = $150,000 Difference = $75,000 Projected Deductible Payout = $52,000 Savings = $23,000 1. Determine losses between $1,000 and $10,000 2. Develop a common denominator (mileage, units, revenue, values) 3. Calculate loss factor 4. Project deductible payout 5. Compare difference in quotes with projected payout
Stratification Table ABC Trucking 4 Year Summary Deductible $ - $ 5,000.00 $ 10,000.00 $ 15,000.00 $ 25,000.00 Total $5,708,141 $4,998,173 $4,679,119 $4,450,670 $4,110,193 Total Cumulative $ - to $ 5,000.00 709,968.00 $709,968.00 $ 5,000.00 to $ 10,000.00 319,054.00 $1,029,022.00 $ 10,000.00 to $ 15,000.00 228,449.00 $1,257,471.00 $ 15,000.00 to $ 25,000.00 $340,477.00 $1,597,948.00 1. Can be used to compare deductible options. 2. Useful in determining frequency in each layer and at what point most of the frequency is absorbed.
IV. Summary Determine what your risks are Avoid or reduce risk wherever possible Work aggressively to minimize claims Be proactive don t wait until the mule has been stolen before locking the gate Motor Carriers least affected by hardening insurance markets were those who had a solid RM program in place. Normally, results are not immediate (increasing risk or decreasing risk)
10816 Executive Center Drive Suite 203 Little Rock, AR 72211 800-833-2015 fax: 501-374-4462