Craft Incentive Programs With Care
What kinds of safety incentives lessen injuries and illnesses, and what kinds inadvertently discourage workers from reporting?
Safety professionals say it’s all in how an incentive program is structured, and perhaps even more importantly, how the importance of maintaining a safe work environment – especially for workers and their families — is communicated.
In 2012, the U.S. Occupational Safety and Health Administration issued a memorandum calling for employers not to provide incentives that effectively discourage employees from reporting their injuries.
Disincentives include awarding paid time off to a unit that has the greatest reduction in incidence rates or maintaining an injury-and illness-free worksite for a period of time.
“If employees do not feel free to report injuries or illnesses, the employer’s entire workforce is put at risk,” OSHA wrote.
“Employers do not learn of and correct dangerous conditions that have resulted in injuries, and injured employees may not receive the proper medical attention, or the workers’ compensation benefits to which they are entitled.
“Ensuring that employees can report injuries or illnesses without fear of retaliation is therefore crucial to protecting worker safety and health.”
The agency last year issued an updated memorandum that detailed the differences between a positive incentive program and one that discourages reporting.
“A positive incentive program,” wrote the agency, “encourages or rewards workers for reporting injuries, illnesses, near-misses, or hazards; and/or recognizes, rewards, and thereby encourages worker involvement in the safety and health management system.”
The memorandum included examples of positive incentives such as “providing tee shirts to workers serving on safety and health committees; offering modest rewards for suggesting ways to strengthen safety and health; or throwing a recognition party at the successful completion of company-wide safety and health training.”
The agency warned that incentive programs that focus on injury and illness numbers often have the effect of discouraging workers from reporting an injury or illness.
Disincentives to reporting, it said, “may range from awarding paid time off to a unit that has the greatest reduction in incidence rates to rewarding workers with a celebration for achieving an injury/rate reduction goal or maintaining an injury-and illness-free worksite for a period of time.”
“There are also programs that actually defeat the purpose, by telling people that they can get paid if they don’t have accidents. But that sends the wrong message.” — Brent Jones, safety officer, Red River Army Depot
But these are just memorandums, and since there are no hard and fast rules about such programs, many employers are confused about what is now acceptable to OSHA, said Don Enke, director of risk control services at Safety National.
Enke recently spoke about OSHA’s view of incentive programs in a webinar, “Out Front Ideas with Kimberly George and Mark Walls,” sponsored by Safety National and Sedgwick.
“I think what OSHA is looking for is, does your program have characteristics that would compromise safety, discourage reporting a claim, or even delay reporting a claim?’” Enke said.
“They definitely don’t want anything delaying reporting. And they don’t want anybody retaliated against if they report a claim.”
Traditional safety incentive programs often reward employees for having a certain number of days without any injuries. However, that could discourage employees or their supervisors from reporting an injury, a key concern of OSHA’s.
“What I’m seeing in the workplace with various clients is more of a progressive program of leading indicators vs. lagging indicators,” Enke said.
“It’s recognizing employees for various proactive safety behaviors. That is where I’m seeing more progressive programs or employers moving in that direction, where it’s part of their safety culture.
“They’re getting employee buy-in and ownership, and they’re making employees part of the program where they are involved with hazard indications, reporting near misses, reporting unsafe conditions, even involved with audits, training programs — even taking online training courses.”
Tamara Ulufanua-Ciraulo, director of insurance at Stater Bros. Supermarkets in San Bernardino, Calif., said that safety professionals need to review their incentive program to make sure the organization is not pushing people to not report.
For example, at Stater Bros., no single store carries the sole burden of its own claim costs, Ulufanua-Ciraulo said.
Costs are now spread out across all stores, and each store has a pro rata share of the cost based on man-hours and how injuries are reported.
“That way, no one injury can hurt a store’s profit and loss statement, which minimizes a manager’s desire to not report,” she said.
For its employees, Stater Bros. rewards them for engaging in safe practices that minimize injuries. The grocer holds annual recognition parties, with raffle prizes of gift cards, gas cards and apparel, and catered breakfasts for certain years of no reported injuries.
But Ulufanua-Ciraulo believes incentives like these don’t result in employees not reporting, because the company has also changed the culture about safety, with bulletins saying that what’s most important is the employee — not the organization.
“We recognize employees’ good intentions by giving them positive recognition for staying safe,” she said. That has helped dispel any misunderstanding about reducing injury costs being the company’s top priority, which leads workers to not report.
Brent Jones, safety officer at Red River Army Depot in Texarkana, Texas, said it comes down to how safety incentives are structured and then communicated to employees: “The right tools in the wrong hands can always be detrimental to the organization.”
“We do offer safety incentives, but we don’t tie them to injury rates or anything like that,” Jones said. “Instead, we reward for good behavior in trying to reduce injuries.”
The depot has an “on-the-spot” incentive program, in which supervisors can recognize employees for going above and beyond the standards.
For example, supervisors wouldn’t recognize an employee for wearing personal protection equipment, “because that’s what they’re supposed to do.”
But if an employee reports potential safety hazards, that goes above and beyond, so their supervisor can hand them a ticket that can be redeemed at the safety office for a gift, such as glasses, coffee mugs, backpacks, coolers, chairs, umbrellas.
These all have the depot’s safety logo on them, which also helps the safety team’s communication efforts by publicizing the depot’s commitment to safety when employees use these items outside of the workplace.
The program only works if there is good communication, Jones said.
“A lot of programs are poorly communicated and, in my opinion, don’t work,” he said. “There are also programs that actually defeat the purpose, by telling people that they can get paid if they don’t have accidents. But that sends the wrong message.”
If leadership of an organization thinks incentive programs are only there to encourage fewer accidents, then that’s likely going to give OSHA cause to view their incentive program merely as a way to discourage injury reporting, Jones said.
“The message to employees is that they should keep themselves safe so they can go home to their families without injury,” he said.
“That brings it home a little bit with a whole new outlook. How that message is delivered probably means the most, even with an incentive program.”
Young Brokers for a Young Product
A broker’s youth can often work against them, as many clients typically prefer the most seasoned professional to lead the broker team, or to work with them on a regular basis.
But the case can be different when dealing with cyber insurance, as the product itself is fairly young, experts said.
Cyber insurance has only been around for about 15 years, and is now very different than it was many years ago, when it was a liability-only product, said Stephanie Snyder, national cyber sales leader in the financial services group at Aon Risk Solutions in Chicago.
The evolving cyber insurance field provides a lot of younger brokers “a ton of opportunity.” — Stephanie Snyder, national cyber sales leader, financial services group, Aon Risk Solutions
Given the small number of underwriters and brokers who have historical expertise with the product, the evolving cyber insurance field provides a lot of younger brokers “a ton of opportunity,” Snyder said.
“Since cyber insurance itself is such a young product, there’s really only a handful of people who were around when it came into being,” Snyder said.
“So as need for the product continues to grow, there’s a need for brokers with product expertise in cyber, whether they come from fields outside insurance such as technology or legal, or whether they are joining the insurance industry as their first job.
“So long as brokers demonstrate their technical expertise, clients tend to be more forgiving of youth in this situation.”
That is not to say that Aon doesn’t have both senior and junior brokers on its teams, she said.
“We don’t push any person who doesn’t have the appropriate experience — we want all people to be learning together with cyber,” Snyder said. “It is an evolving product as cyber exposure continues to evolve.”
Jeffrey Lattmann, executive managing director, national executive liability practice with Beecher Carlson in New York City, said that clients want the most knowledgeable cyber professionals placing their business in the marketplace.
The younger brokers are likely to be more in tune with various parts of the risk due to the advancement of technology.
“This encompasses a team made up of seasoned brokers with significant technical knowledge, understanding of the market appetite for a specific risk, experienced risk management personnel and younger brokers who bring a different level of understanding technology risk to the table,” Lattmann said.
“Additionally, helping to identify areas of risk aids in the understanding of the profile of the company looking for coverage.”
For all types of insurance, Beecher Carlson has a senior broker leading each client account, with younger brokers accompanying them to client meetings in order to learn, he said.
Senior brokers have typically been in the business for 15 or 30 years, and understand strategy, insurance companies’ appetites for risk, how to best structure specific programs, and placing sophisticated transactions with significant limits.
Younger brokers are likely to be more in tune with various parts of the risk due to the advancement of technology.
“We just took over a large client and they specifically wanted a senior person on our team to be the lead person,” Lattmann said.
“The other brokers they’ve used in the past had senior people in the presentations, but when it got down to the transaction, they never saw them again. We committed the senior person to be the point person all the time.”
Still, young brokers need to sit in on meetings with the client.
“In order for seasoned professionals to educate the young brokers to one day be leaders, younger brokers have to spend time with clients and experienced brokers,” he said.
“Working in the background is not the most effective learning tool — they have to be upfront and learning alongside the senior people.”
Regardless of age or experience, a young producer should nevertheless take “a mature risk management approach to cyber — measure the exposure and mitigate it,” said Martin J. Frappolli, senior director of knowledge resources for The Institutes’ risk and insurance knowledge group in Malvern, PA.
When there is a newly discovered risk, insurers typically scramble to exclude coverage and those at risk scramble to insure the risk, Frappolli said. The Institutes has been examining the ramifications of the maturity model pertaining to cyber insurance.
“As time goes by, market participants understand that insurance is just one tool in a risk manager’s toolbox.” — Martin J. Frappolli, senior director of knowledge resources, The Institutes
“As time goes by, market participants understand that insurance is just one tool in a risk manager’s toolbox,” he said.
“We like to compare cyber to fire. We build fire-safe structures, we hold fire drills, we install extinguishers and sprinklers. We do all we can to mitigate the fire risk. Then we buy insurance.
“At some point, we’ll have better cyber hygiene and follow the mature risk management model just as we handle the threat of fire.”
Cyber is “immature” in the sense that some insurers still scramble to exclude it — though many are figuring out, as always, there is a right price for every risk, Frappolli said. Those at risk often do nothing to mitigate the risk other than seek insurance.
“All this is to say that an experienced agent or broker already knows all this,” he said. “If the young producer is focused on sales instead of risk management, he or she could indeed be closed out by prospective customers.
“But when the agent or broker takes a mature risk management approach to cyber — measure the exposure and mitigate it — that approach should be persuasive to any client.”
Organic growth at brokerage firms slowed and profit margins declined last year.
The soft market for commercial property and casualty premiums, continued modest growth in the U.S. economy, and a sharp decline in crude oil prices are contributing to the problem, according to Reagan Consulting’s “Organic Growth and Profitability” survey.
Agent-broker organic revenue growth slowed to 4.6 percent for 2015, from 6.2 percent each year since 2012. That’s according to a survey of roughly 140 mid-size and large agencies and brokerage firms conducted by the Atlanta consulting firm.
Profit margins declined to 20.1 percent, a year after reaching record profitability of 21 percent in 2014.
The single greatest driver was likely commercial P&C pricing, which has now entered “soft-market” territory, said Kevin Stipe, Reagan Consulting president.
According to the Council of Insurance Agents and Brokers, Q4 2015 pricing decreased by 2.8 percent, compared with a 0.1 percent increase in 2014.
“Carriers are competing to get insurance premium dollars,” Stipe said.
“The macro dynamics of their marketplace indicate they’ve made enough money in recent times being more aggressive in pricing trying to get market share, and that’s driving premiums down as they compete for customers.
“This makes it harder for insurance brokers to grow, as the majority of a broker’s revenue is commissions from placing insurance.”
The U.S. economy’s growth also contributed, as the U.S. gross domestic product grew by only 2.4 percent in 2015, and decelerated to 0.7 percent during the fourth quarter.
“The pricing on accounts is driven by insurable exposures, such as the revenue or the payroll of the account,” Stipe said. “When the economy stalls out, exposures tend to decrease, resulting in reduced premiums, which results in reduced broker commissions.”
Despite the setbacks, more than two-thirds (68 percent) of surveyed brokerages expect a rebound of growth in 2016.
Another factor slowing organic growth was the sharp decline in oil prices, he said.
After trading above $100 dollars per barrel in 2013, oil closed out 2015 at roughly $37 per barrel. During the “oil boom,” brokerages in the major oil producing states grew by 9.4 percent, a full 3.3 percentage points faster than the other firms in the survey.
Two years later, during the 2015 “oil bust,” the oil-state firms grew at only 2.5 percent, which was 2.3 percentage points slower than the other firms.
“Many boom towns in places like West Texas and South Dakota are now becoming ghost towns as projects in those towns have been scuttled,” Stipe said.
“Accounts in those towns that are oil-and-gas related are now rapidly shrinking, resulting in declining insurance costs. Brokers that rode the wave up on those geographies are now experiencing a dramatic reversal of fortune.”
Rebound of Growth
Despite the setbacks, more than two-thirds (68 percent) of surveyed brokerages expect a rebound of growth in 2016, with a median projection of 6 percent. Slightly more than half also expect profit margins to improve, although the improvement is projected to be nominal.
Still the future is “really uncertain,” Stipe said.
“I think there are some alarming trends with a relatively weak economy and with softening P&C pricing,” he said. “But there are also plenty of things that could ultimately serve to create a rebound.
“If P&C pricing stabilizes or rebounds slightly, that would be a good thing, and certainly if the economy picks up that would also help. For individual firms, it’s all about things they can control, such as building a sales culture.”
Robert Rusbuldt, president and chief executive of the Independent Insurance Agents & Brokers of America in Alexandria, Va., said that organic growth for independent agencies obviously varies by agency, by line of business, geographic region, and other factors.
“While the wholesale industry has experienced similar rates of organic growth as the retail side … I think our profit margins have overall improved over the past several years … .” — Bobby Owens, president, programs division, Risk Placement Services
“However, the dominant factor is the state of the economy in the country, and in the region or state where the agency is located,” Rusbuldt said.
He noted that independent agencies can increase organic growth by enhancing technology capabilities, implementing workflow efficiencies and increasing digital marketing.
Wholesale brokers are feeling the pinch on the retail side, said Bobby Owens, president of the programs division at wholesale broker Risk Placement Services Inc. in Lexington, Ky., who serves as the treasurer of the American Association of Managing General Agents.
On the specialty side in particular, organic growth is slowing mainly because the property market has been softening over the last two or three years and pricing has been going down, Owens said.
“While the wholesale industry has experienced similar rates of organic growth as the retail side, interestingly enough I think our profit margins have overall improved over the past several years because our industry has become much more efficient, mainly through expense control due to automation,” he said.
Looking forward, if the economy begins to slow, it will definitely affect the wholesale side as well, Owens said.
“We will see less business, and the market overall will become a lot more competitive due to more capacity in the industry,” he said. “I’m also worried that a slowing economy will dry up new ventures, which typically are written by the wholesale market.”
M&As will eventually slow down because of a shrinking pool of available larger agencies offering scale that have not already been involved in M&A activity.
While organic growing has slowed, merger and acquisition activity among agents and brokers was at an all-time high in 2015, Stipe said, noting that North American deals topped 400 for the first time ever, and “valuations hit record levels for firms of all sizes.”
M&A activity is at a current “frenzy” because of low interest rates, a volatile stock market, technology advances, and retiring baby boomers creating a ready pipeline for acquisitions. However, it is unrealistic to expect the pace to continue, Rusbuldt said.
M&As will eventually slow down because of a shrinking pool of available larger agencies offering scale that have not already been involved in M&A activity.
In addition, inexpensive capital will eventually end; ROI will increase in other sectors and vehicles; and the math of high multiples for agencies in many cases outpaced the possibilities for efficiencies and/or organic growth.
“While no one can predict an exact date when agency M&A will slow down, it is inevitable,” Rusbuldt said. &