risk management as a strategic business unit
DESCRIPTION
Presentation from NAPEO that addresses Risk Management as a Strategic Business Unit.TRANSCRIPT
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
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
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
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
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?
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?
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
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?
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?
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
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
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
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?
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
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”?
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
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?
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
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…)
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?
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
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
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
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
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