Managing Risk & Insurance Costs

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Managing Risk & Insurance Costs

What Are Your Options?

Truckload Carriers Association 2004 Annual Conference By: Terry Burnett

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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

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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

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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)

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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

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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

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Retention vs. Transfer

Retain Transfer Frequency S e v e r i t y

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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

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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.

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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

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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

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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.

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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

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III. Managing Insurance Costs

B

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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.

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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?

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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.

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Deductible Analysis

.171 3,500,000 60,000 03 .130 11,000,000 143,000 Total .053 3,000,000 16,000 02 .100 2,500,000 25,000 01 .210 2,000,000 42,000 00 Factor Annual Miles $1,000 to $10,000 Year

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

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Stratification Table

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

ABC Trucking

4 Year Summary

1. Can be used to compare deductible options.

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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.

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