Download - Risk Management as a Strategic Business Unit
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NAPEO’s Risk Management WorkshopMarch 24-25, 2009, Tampa Airport Marriott
NAPEO Risk Management Conference
March 25, 2009
Tampa, Florida
Risk Management as a Strategic Business Unit
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NAPEO’s Risk Management WorkshopMarch 24-25, 2009, Tampa Airport MarriottCopyright © 2009 by NAPEO. All rights reserved
Introduction
• Session Objectives– Discuss the strategic role of Risk Management inside your
PEO• Determine whether Risk Management is a “service” or a “product”
– Provide an overview of PEO Risk Management • Strategy• Positioning• Financial Performance Metrics• Macro Performance Metrics
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NAPEO’s Risk Management WorkshopMarch 24-25, 2009, Tampa Airport MarriottCopyright © 2009 by NAPEO. All rights reserved
Strategy/Positioning(Opportunity)
• Why is Risk Management important to PEO clients?
From a “safety” perspective:– 98% of businesses in America today have < 100 wses– 87% of businesses in America today have < 20 wses– 50% of all workplace fatalities occur in businesses with <100 wses– 33% of all workplace fatalities occur in businesses with <20 wses
(statistics based on NIOSH White Paper)
PEOs are uniquely qualified to deliver valuable safety services
to their clients
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NAPEO’s Risk Management WorkshopMarch 24-25, 2009, Tampa Airport MarriottCopyright © 2009 by NAPEO. All rights reserved
Strategy/Positioning(Opportunity)
• Other General Risk Management Considerations– Employees who might use workers compensation as a
hedge against downsizing – Employees who might use workers compensation as a
substitute for a weak or missing employee benefits plan– General human resources practices and avoiding claims
related to employment practices liability
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NAPEO’s Risk Management WorkshopMarch 24-25, 2009, Tampa Airport MarriottCopyright © 2009 by NAPEO. All rights reserved
Strategy/Positioning(Barriers)
• Issue: What carrier limitations do I have?– What is the carrier’s admitted geography?– What is the carrier’s financial rating?– What is the carrier’s underwriting appetite?
• Issue: Where are my clients?– How can I cover the geographic spread?– What is the average client size?
• Issue: What’s the right service model and staffing level for my client base and operating budget?
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NAPEO’s Risk Management WorkshopMarch 24-25, 2009, Tampa Airport MarriottCopyright © 2009 by NAPEO. All rights reserved
Strategy/Positioning
• What’s troubling CEOs? (2004 Conference Board Survey of CEOs)
– Issue: Is top line growth satisfactory?– Question: is risk management adding to or detracting
from this effort?– Issue: Is customer loyalty/retention at an acceptable
level?– Question: Does risk management add value, detract from
value, or is it neutral to my clients?
Could or should either of these be different in my PEO?
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NAPEO’s Risk Management WorkshopMarch 24-25, 2009, Tampa Airport MarriottCopyright © 2009 by NAPEO. All rights reserved
Strategy/Positioning
• Do you want risk management to be a sustainable (long term) competitive advantage or a contestable (short term) competitive advantage?– Workers Compensation Risk Management Program
Components:• Carrier Quality and Plan Design• Client Value Proposition• PEO Risk Management Operating Platform• Actual Client Experience
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NAPEO’s Risk Management WorkshopMarch 24-25, 2009, Tampa Airport MarriottCopyright © 2009 by NAPEO. All rights reserved
Strategy/Positioning
• Carrier Quality and Plan Design– Is carrier rating and admitted geography important to you
and your clients?– Are your clients buying because of workers compensation?
If not, is it a barrier to sales?– Is the financial structure of your program best suited to
your needs?
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NAPEO’s Risk Management WorkshopMarch 24-25, 2009, Tampa Airport MarriottCopyright © 2009 by NAPEO. All rights reserved
Strategy/Positioning
• Value Proposition/Client Experience– What does your risk management value proposition look
like? What do you promise? What do you deliver?– What can I expect as a client?
• Risk Selection– Residual markets have depopulated by 10% in the past
year (PEO sized clients). Who are you getting? Are clients leaving you due to better workers compensation pricing elsewhere?
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NAPEO’s Risk Management WorkshopMarch 24-25, 2009, Tampa Airport MarriottCopyright © 2009 by NAPEO. All rights reserved
Strategy/Positioning
• The real questions are—
What will you excel at?
What won’t you do?
Competitive advantages erode over time and must stay fresh
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NAPEO’s Risk Management WorkshopMarch 24-25, 2009, Tampa Airport MarriottCopyright © 2009 by NAPEO. All rights reserved
The “Myth of Excellence”(by Fred Crawford and Ryan Matthews)
• Five opportunities to engage customers—Price, Service, Access, Product, Customer Experience
• Consumer Relevancy of each of the five “touch points” is on three levels:– Acceptance: customer views as “par” for the industry. No
sense of loyalty, transactional relationships– Preference: customer prefers your company to another
due to a deeper level of respect, access, and quality– Seeking: customer will seek you out above the competition
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NAPEO’s Risk Management WorkshopMarch 24-25, 2009, Tampa Airport MarriottCopyright © 2009 by NAPEO. All rights reserved
The “Myth of Excellence”
• The Trap: Complacency “73 percent of executives think their firms have an edge on their
competitors” (Chief Executive/Arthur D. Little poll)
• The Myth: No company (even excellent companies) can perform at a level of excellence in all five areas at once
• The Goal: – Dominate in one area– Differentiate in one area– Meet the industry par in the remaining three areas
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NAPEO’s Risk Management WorkshopMarch 24-25, 2009, Tampa Airport MarriottCopyright © 2009 by NAPEO. All rights reserved
Strategic Goals
• Grow the top line
• Retain existing clients
• Questions:– When you think of your risk management program can you
think of an area where you clearly dominate your segment?
– Is it the right area to dominate?– Why should a client “buy” your risk management value
proposition?
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NAPEO’s Risk Management WorkshopMarch 24-25, 2009, Tampa Airport MarriottCopyright © 2009 by NAPEO. All rights reserved
Rate Your Risk Management Platform(1 to 5: 5= dominate, 4= differentiate)
Carrier Quality
Value Proposition
Operating Platform
Actual Client Experience
Price Service Product Experience Access
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NAPEO’s Risk Management WorkshopMarch 24-25, 2009, Tampa Airport MarriottCopyright © 2009 by NAPEO. All rights reserved
Strategic Goals
• How will you achieve “excellence”?– Carrier Reputation/Relationship– Excellent Service—Claims and Risk Control– Ease of Doing Business—Underwriting Approval– Coverage Design—National Platform– Client Experience and Stewardship
• Where do you want to “dominate”?
• Where do you want to “differentiate”?
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NAPEO’s Risk Management WorkshopMarch 24-25, 2009, Tampa Airport MarriottCopyright © 2009 by NAPEO. All rights reserved
MR2P(Managing Risk to Profitability)
• Early PEOs depended on workers compensation arbitrage in their pricing models
• Today’s profitable PEOs– Recognize the importance of high quality, long-term carrier
relationships– Strive to implement “best in class” risk management
practices– Manage workers compensation as a “product” with a
profit/loss mindset
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NAPEO’s Risk Management WorkshopMarch 24-25, 2009, Tampa Airport MarriottCopyright © 2009 by NAPEO. All rights reserved
Goals(“Without a vision the people will perish”)
• Do you have a clear vision for your risk management platform? Do you know what you want to achieve?
• Can your leadership team articulate your vision?
• Does your leadership team support your vision?
• Have you established performance goals and metrics that support your vision?
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NAPEO’s Risk Management WorkshopMarch 24-25, 2009, Tampa Airport MarriottCopyright © 2009 by NAPEO. All rights reserved
Financial Performance Measures
• Total Cost of Risk (TCOR)
• Loss Ratio
• Expense Ratio
• Risk Management Income Statement
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NAPEO’s Risk Management WorkshopMarch 24-25, 2009, Tampa Airport MarriottCopyright © 2009 by NAPEO. All rights reserved
Total Cost of Risk
• Losses Due to Accidents (fully developed)
• Program Costs (reinsurance, claims handling expenses, carrier loss control, taxes, etc…)
• Agent /Broker Fee or Commission
• Internal Staff expense (administration, claims management, risk control, etc…)
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NAPEO’s Risk Management WorkshopMarch 24-25, 2009, Tampa Airport MarriottCopyright © 2009 by NAPEO. All rights reserved
Financial Performance Ratios
• Loss Ratio = losses/premium (what’s acceptable?)
• Expense Ratio = expenses/premium
• Combined Ratio = losses + expenses/premium
These are common ratios used by carriers in evaluating their performance—why should you think differently?
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NAPEO’s Risk Management WorkshopMarch 24-25, 2009, Tampa Airport MarriottCopyright © 2009 by NAPEO. All rights reserved
Risk Management Income Statement
RevenuesPremium
Consulting Fees (if any)
Total Revenues
Expenses
Losses
Program Costs
Agent/Broker Fees
Internal Expenses
Total Expenses
Profit/Loss
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NAPEO’s Risk Management WorkshopMarch 24-25, 2009, Tampa Airport MarriottCopyright © 2009 by NAPEO. All rights reserved
Macro Performance Metrics
• Table of Truth– New Claims Frequency– New Claims Reporting Lag Time– Claims Closing Rate– Loss Ratio
• Exposure Base
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NAPEO’s Risk Management WorkshopMarch 24-25, 2009, Tampa Airport MarriottCopyright © 2009 by NAPEO. All rights reserved
Challenges in the Current Environment
Issue: Premium reductions in certain states are resulting in
substantially less program revenue
Results:
1. Higher loss ratios
2. Higher expense ratios-staffing costs remain constant or increase
3. Less pricing flexibility
4. Compressed margins
5. Higher mod rates
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NAPEO’s Risk Management WorkshopMarch 24-25, 2009, Tampa Airport MarriottCopyright © 2009 by NAPEO. All rights reserved
Challenges in the Current Environment
Issue: Carrier Performance 1. Declining operating performance
2. Lack of investment income
3. Lack of new capital
Results: 1. Potential change in program structure
2. More selective underwriting
3. Potentially decreased capacity for PEO space
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NAPEO’s Risk Management WorkshopMarch 24-25, 2009, Tampa Airport MarriottCopyright © 2009 by NAPEO. All rights reserved
Summary
• Risk Management can be viewed as either a “service” or a “product.”
• Excellence in Risk Management requires a clear vision with defined performance metrics
• Risk Management strategy requires identifying an area of domination and an area of differentiation with a focus on customer acceptance
• Risk Management can and should be measured financially in terms of financial performance and profit margin