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It would be best today if insurance agents who play in a true risk reduction role have an education in law, as well.

Risk Managers' Forum

Raising the bar with risk management

Managing total cost of risk for those clients who recognize the value of that approach

By Tim Starr, CIC, CRM

It was not long ago that the relationship between a business and its insurance agent/agency was, well, just insurance. That relationship was based almost solely on transferring risk to the insurance company unless one played in the large account space. This space was for many years relegated to the "alphabet houses" only; the Aons and Marshes of the world. Much has changed since agents have pursued significant education and additional degrees in insurance and risk management.

In 2013, an agent needs to have earned additional "stripes" in several areas. To be taken seriously, to deserve the right to work with any formidable business, an agent needs to be well versed in contracts and have back-room staff support, meaning his or her agency has a multitude of skill sets beyond the marketing and placement of insurance.

The historical responsibility of an insurance agency is to provide its customer with an insurance product that responds to all the losses they decided not to self-insure. Unfortunately, this does not speak to the reduction of risk accomplished via other means. Nowadays, there is a change from the traditional insurance agent role, and today's agents typically serve as their client's Chief Risk Officer (CRO), so to speak.

The "bar of expectation and excellence" has been raised as the controlling of risk goes well beyond simply providing a customer with a risk transfer vehicle such as an insurance policy. I often say it would be best today if insurance agents who play in a true risk reduction role have an education in law, as well. The contracts that customers enter into with each other invariably include obligations involving clients' liability exposures. Eighty percent of all risk comes from people instead of other causes, such as hurricane, tornado, etc. The ideal is to stand 1,000 feet over the business and evaluate, via discovery, how that risk is defined within each entity. Once and only when this is accomplished can an appropriate plan be put into place.

This necessitates multiple resources an agent either must possess or have available to make it all happen. Clearly, one person cannot accomplish all of this. When you factor in human resources, contractual matters, safety issues, and department of transportation compliance issues (for those that have vehicles), other skilled persons are needed to suggest a true risk reduction solution.

Total cost of risk

It is suggested that 20% of a company's cost of risk is in the insurance policy premium. This leaves the remaining 80% in other professional costs, i.e., accountants, lawyers, human resources expertise, and the indirect costs of losses that do occur and the opportunity cost of not considering alternatives when losses do occur.

The language so often used by agencies providing business insurance inevitably speaks of controlling their customer's "total cost of risk." How is this accomplished? Executing this objective is much more easily promoted than actually completed. This is because many agencies do not have the appropriate tools and resources to: (1) take the prospect through appropriate discovery of risk, and (2) reduce risk and report back to the appropriate parties the quantifiable changes. Agents should help their clients to determine what their return on investment actually is; this typically can be justified only for large accounts where the loss behavior is as expected.

When determining total cost of risk and, ultimately, return on investment, I have witnessed some progressive agencies doing their best to do both. Yet I find that the property and casualty side of the industry has provided few tools for agencies to accomplish this goal. As a matter of fact, I find robust wellness programs have done a better job of quantifying a legitimate ROI than the P-C side of our industry. I would suggest this will improve as the "bar of excellence" continues to be raised.

Choose customers wisely

While some accounts have come to expect more from their agency, the fact is there are still many mid-sized accounts that do not really care about the tools and abilities you may bring to the party, meaning they still seem to focus on the end premium with little regard to your capabilities. This is something that will not change for some businesses. Therefore, it is our job as providers of true risk reduction abilities to align ourselves with those who respect and desire what we can do for their business.

The idea is to minimize the size of a company's "bull's eye," if you will. There are so many areas within each company to look at, and new arenas of loss are created all the time. The Internet alone has created a whole new area of risk. An agent can make a living just being an expert in the risks associated with this technology. This suggests how complicated our industry can be and yet also speaks to the opportunities we have if we take advantage of the power of knowledge. Cyber liabilities represent a real exposure for companies. The data one controls and manipulates is, in many cases, an asset of others that our insureds have the responsibility to protect. Additionally, the unintentional infringement of other's intellectual assets is a real exposure.

Enterprise risk management

Today there is also much discussion about Enterprise Risk Management (ERM). The basics of ERM can be applied to companies of most sizes and can be helpful in creating separation from those agents who do not understand this concept. Much of this discussion is rather logical as to how a company might respond to unexpected occurrences that may or may not involve insurance. Matters like reputational risk or post-disaster response can cause potentially crippling results if things go wrong and are not anticipated in advance.

We are constantly amazed by those companies that do not even have a disaster response plan, let alone a team, spokesperson, and energy-generating alternatives. There are some great alternatives in the marketplace where your customer can have an arrangement with a disaster recovery company to prepare them in multiple ways for unexpected serious losses, regardless of whether these losses are insured or not.

At the end of the day, I would suggest that agents ask themselves whether they are providing an insurance experience or a risk management experience with their customers. A risk management relationship provides you with information gained as a result of thorough risk discovery in the areas where risk comes from—most important, people. Are you providing feedback regarding human resources, safety, and transportation (where applicable) so you can improve compliance and reduce risk in those areas?As we so often share with customers and prospects: You have the right to refuse, but you also have the right to know. Yes, the bar has been raised, and only through appropriate risk discovery, not just the placement of a policy, should one suggest providing risk management or the skill sets to minimize a business's total cost of risk. The fact is, their risk wellness is at stake, not to mention your reputation.

Any agent playing in the space of true risk reduction must continue to be a student of this industry. In so doing we learn along the way how better to distinguish those simply seeking a lower premium from those who want what we provide because it improves their business.

The author

Tim Starr, CIC, CRM, CWCA, CRIS, is president and owner of the Starr Group in Greenfield, Wisconsin. He is an active member of APPEX, a group of peak performing agencies of MarshBerry.

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