Risk Insider: Andrew Bent

Realizing the True Cost of Risk

By: | June 27, 2016 • 2 min read
Andrew Bent is the Manager of the Alberta Energy Regulator’s Enterprise Risk Management Team. He leads the enterprise risk practice for the AER, and supports operational risk management activities. The views expressed in this article are those of the author, and not necessarily of the employer. He can be reached at [email protected]

Let me get right to the point: Total Cost of Risk (TCoR) usually isn’t.

Don’t get me wrong — calculating the Total Cost of Risk makes a lot of sense. Understanding our risk-related costs allows us to focus on those areas where we can reduce our expenses. The problem is that we often miss the “slow drip” costs in our risk control efforts, meaning we can miss opportunities to save our organizations some serious cash.

Why does this happen? A lot of it comes down to how we traditionally define the elements of our total cost of risk. The profession has agreed (for the most part), that TCoR contains three elements:

Total Cost of Risk = Insurance Premiums + Retained Losses + Risk Control Costs

Calculating our insurance premium costs usually doesn’t cause us too much heartache. We pull out the invoices and tally up how much premium we paid. It doesn’t really matter if we utilize a captive or place lines in the market; premium is premium.

By applying this cost-focused risk lens to their business processes, organizations tap into a wider pool of expertise when identifying systemic inefficiencies.

Sure, we might need to do some fancy allocation math, but let’s be realistic: If we don’t know how big the insurance check is every year then calculating TCoR is probably the least of our worries.

You might think that calculating retained losses should be pretty straightforward as well. Traditionally we would include items like deductibles (insurance or workers’ comp), costs of minor repairs or replacements, ex gratia payments, etc.

But what about the losses we retain from missing an opportunity to be first to market with a new product? What about our lost sales revenues caused by product recalls or data breaches? For all the talk about the value of reputation, how many organizations currently factor in the loss they retain when their reputation takes a hit?

Risk control costs can include both internal and external expenditures, and are often the hardest to track. Traditionally, we would include costs of attorneys and auditors, the salary and benefits of our risk management teams, and maybe the training and equipment costs of our safety or quality programs.

But what about other costs of regulatory compliance such as complying with environmental protection requirements? Do we account for the staff time it takes us to perform our SOX audits? What about the payroll tied up in business or enterprise risk register review sessions?

By applying a broader, enterprise definition to retained losses and control costs, organizations can identify new opportunities to reduce cost across the full spectrum of risk.

By applying this cost-focused risk lens to their business processes, organizations tap into a wider pool of expertise when identifying systemic inefficiencies. Accounting for those inefficiencies through a robust TCoR process can help to drive risk-informed improvements to business processes, and accelerate cost savings.

After all — reducing the true total cost of risk is something leaders of every organization can get behind.

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Risk Insider: Jack Hampton

Nobody Likes a Bully. Or Do We?

By: | June 24, 2016 • 2 min read
Jack Hampton is a Professor of Business at St. Peter’s University in New Jersey and a former Executive Director of the Risk and Insurance Management Society (RIMS). He was named a Risk Innovator in 2008 by Risk and Insurance®. He can be reached at [email protected]

When I was a kid I had to walk home from school past Kenny’s house.

I sometimes forget my wife’s name, but I never forget his. He was a bully who tortured passers-by. I frequently walked four blocks out of the way to avoid him. Even then, I was engaging in risk management.

That was my first experience with coercive power. Subsequently, I encountered it in the workplace. Managers forcing employees to follow orders by threatening them with punishment if they did not comply.

The application of force is a big risk management issue. Employees usually can’t sue the boss if they get hurt on the job. However, they can win big judgments for bullying — discrimination, failing to pay earned wages, egregious violations of employee rights.

For the past four months, I have been intrigued by the topic of coercive power. Two people were the focus of my attention: Donald Trump and Paul Bailo.

I hardly need to report many details on Mr. Trump. It has become an evening news ritual to see which person was the target of his bullying.

That’s politics, not the workplace. Coercive power is not the concern of risk managers. Tell that to Paul Bailo.

The application of force is a big risk management issue. Employees usually can’t sue the boss if they get hurt on the job. However, they can win big judgments for bullying — discrimination, failing to pay earned wages, egregious violations of employee rights.

The newly minted Dr. Bailo defended his dissertation and received a Ph.D by writing about bullying in the workplace today. He surveyed 400 MBA candidates grouped into Generation X and Y by birthday, male and female by gender.

All of them said they do not use coercive power with their subordinates and colleagues. Thank goodness. Such behavior is not pretty and it’s risky.

Another finding was disturbing. All four groups said their bosses use it as a tool to drive subordinates to achieve goals.

Further, senior managers tolerate or encourage negative reinforcement. Senior executives seek the glory of making Fortune’s “100 Best Companies to Work For“ list. Do they know what’s going on in their own organizations?

Bailo’s research is not a big surprise to risk managers. They know we need to protect employees from retaliation when they refuse to break laws or report illegal behavior. They keep records of grievances, injuries resulting from unsafe conditions, and discrimination and harassment lawsuits. They strive to reduce bullying incidents.

I do think it’s a wake-up call for senior executives. MBA candidates, male and female, older and younger, uniformly agreed that coercive behavior is alive and well with their bosses and their bosses’ bosses. That’s big news in 2016.

Are we still in 2002 when a jury awarded almost $12 million to an employee who was retaliated against for taking time off under the Family Medical Leave Act to care for his aging parents?

I wonder if senior executives remember Ani Chopourian and all the bullying complaints she filed when she worked as a physician’s assistant.

Would a jury agree with her employer that she was guilty of professional misconduct, the stated explanation for the reason the hospital fired her and tried to deny her unemployment benefits?

I guess not. In 2012, a jury in Sacramento awarded her $168 million in damages, possibly the largest workplace harassment judgment in U.S. history.

Mr. Trump and Dr. Bailo bring back the memory of Kenny in different ways but they send the same message.  I encourage risk managers to enhance their efforts to wipe out bullying in the workplace.

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Sponsored: Liberty Mutual Insurance

Commercial Auto Warning: Emerging Frequency and Severity Trends Threaten Policyholders

Commercial auto policyholders should consider utilizing a consultative approach and tools to better manage their transportation exposures.
By: | June 1, 2016 • 6 min read

The slow but steady climb out of the Great Recession means businesses can finally transition out of survival mode and set their sights on growth and expansion.

The construction, retail and energy sectors in particular are enjoying an influx of business — but getting back on their feet doesn’t come free of challenges.

Increasingly, expensive commercial auto losses hamper the upward trend. From 2012 to 2015, auto loss costs increased a cumulative 20 percent, according to the Insurance Services Office.

“Since the recession ended, commercial auto losses have challenged businesses trying to grow,” said David Blessing, SVP and Chief Underwriting Officer for National Insurance Casualty at Liberty Mutual Insurance. “As the economy improves and businesses expand, it means there are more vehicles on the road covering more miles. That is pushing up the frequency of auto accidents.”

For companies with transportation exposure, costly auto losses can hinder continued growth. Buyers who partner closely with their insurance brokers and carriers to understand these risks – and the consultative support and tools available to manage them – are better positioned to protect their employees, fleets, and businesses.

Liberty Mutual’s David Blessing discusses key challenges in the commercial auto market.

LM_SponsoredContent“Since the recession ended, commercial auto losses have challenged businesses trying to grow. As the economy improves and businesses expand, it means there are more vehicles on the road covering more miles. That is pushing up the frequency of auto accidents.”
–David Blessing, SVP and Chief Underwriting Officer for National Insurance Casualty, Liberty Mutual Insurance

More Accidents, More Dollars

Rising claims costs typically stem from either increased frequency or severity — but in the case of commercial auto, it’s both. This presents risk managers with the unique challenge of blunting a double-edged sword.

Cumulative miles driven in February, 2016, were up 5.6 percent compared to February, 2015, Blessing said. Unfortunately, inexperienced drivers are at the helm for a good portion of those miles.

A severe shortage of experienced commercial drivers — nearing 50,000 by the end of 2015, according to the American Trucking Association — means a limited pool to choose from. Drivers completing unfamiliar routes or lacking practice behind the wheel translate into more accidents, but companies facing intense competition for experienced drivers with good driving records may be tempted to let risk management best practices slip, like proper driver screening and training.

Distracted driving, whether it’s as a result of using a phone, eating, or reading directions, is another factor contributing to the number of accidents on the road. Recent findings from the National Safety Council indicate that as much as 27% of crashes involved drivers talking or texting on cell phones.

The factors driving increased frequency in the commercial auto market.

In addition to increased frequency, a variety of other factors are driving up claim severity, resulting in higher payments for both bodily injury and property damage.

Treating those injured in a commercial auto accident is more expensive than ever as medical costs rise at a faster rate than the overall Consumer Price Index.

“Medical inflation continues to go up by about three percent, whereas the core CPI is closer to two percent,” Blessing said.

Changing physical medicine fee schedules in some states also drive up commercial auto claim costs. California, for example, increased the cost of physical medicine by 38 percent over the past two years and will increase it by a total of 64 percent by the end of 2017.

And then there is the cost of repairing and replacing damaged vehicles.

“There are a lot of new vehicles on the road, and those cost more to repair and replace,” Blessing said. “In the last few years, heavy truck sales have increased at double digit rates — 15 percent in 2014, followed by an additional 11 percent in 2015.”

The impact is seen in the industry-wide combined ratio for commercial auto coverage, which per Conning, increased from 103 in 2014 to 105 for 2015, and is forecast to grow to nearly 110 by 2018.

None of these trends show signs of slowing or reversing, especially as the advent of driverless technology introduces its own risks and makes new vehicles all the more valuable. Now is the time to reign in auto exposure, before the cost of claims balloons even further.

The factors driving up commercial auto claims severity.

Data Opens Window to Driver Behavior

To better manage the total cost of commercial auto insurance, Blessing believes risk management should focus on the driver, not just the vehicle. In this journey, fleet telematics data plays a key role, unlocking insight on the driver behavior that contributes to accidents.

“Roughly half of large fleets have telematics built into their trucks,” Blessing said. “Traditionally, they are used to improve business performance by managing maintenance and routing to better control fuel costs. But we see opportunity there to improve driver performance, and so do risk managers.”

Liberty Mutual’s Managing Vital Driver Performance tool helps clients parse through data provided by telematics vendors and apply it toward cultivating safer driving habits.

“Risk managers can get overwhelmed with all of the data coming out of telematics. They may not know how to set the right parameters, or they get too many alerts from the provider,” Blessing said.

“We can help take that data and turn it into a concrete plan of action the customer can use to build a better risk management program by monitoring driver behavior, identifying the root causes of poor driving performance and developing training and other approaches to improve performance.”

Actions risk managers can take to better manage commercial auto frequency and severity trends.

Rather than focusing on the vehicle, the Managing Vital Driver Performance tool focuses on the driver, looking for indicators of aggressive driving that may lead to accidents, such as speeding, sharp turns and hard or sudden braking.

The tool helps a risk manager see if drivers consistently exhibit any of these behaviors, and take actions to improve driving performance before an accident happens. Liberty’s risk control consultants can also interview drivers to drill deeper into the data and find out what causes those behaviors in the first place.

Sometimes patterns of unsafe driving reveal issues at the management level.

“Our behavior-based program is also for supervisors and managers, not just drivers,” Blessing said. “This is where we help them set the tone and expectations with their drivers.”

For example, if data analysis and interviews reveal that fatigue factors into poor driving performance, management can identify ways to address that fatigue, including changing assigned work levels and requirements.  Are drivers expected to make too many deliveries in a single shift, or are they required to interact with dispatch while driving?

“Management support of safety is so important, and work levels and expectations should be realistic,” Blessing said.

A Consultative Approach

In addition to its Managing Vital Driver Performance tool, Liberty’s team of risk control consultants helps commercial auto policyholders establish screening criteria for new drivers, creating a “driver scorecard” to reflect a potential new hire’s driving record, any Motor Vehicle Reports, years of experience, and familiarity with the type of vehicle that a company uses.

“Our whole approach is consultative,” Blessing said. “We probe and listen and try to understand a client’s strengths and challenges, and then make recommendations to help them establish the best practices they need.”

“With our approach and tools, we do something no one else in the industry does, which is perform the root cause analysis to help prevent accidents, better protecting a commercial auto policyholder’s employees and bottom line.”

To learn more, visit https://business.libertymutualgroup.com/business-insurance/coverages/commercial-auto-insurance-policy.

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This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.


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Liberty Mutual Insurance offers a wide range of insurance products and services, including general liability, property, commercial automobile, excess casualty, workers compensation and group benefits.
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