Large companies that cover claims in-house require special expertise from brokers
Actuarial abilities, risk management experience, and industry knowledge–these are the skills brokerages need in order to work with large commercial accounts that choose to handle claims out of their own pockets.
According to brokers working with national retailers, manufacturers and fast-food companies–businesses that commonly choose the self-insured route–the ability to identify, price and compare risks for these high-end clients goes a long way towards ensuring those customers are covered, even when they eschew insurance.
The first step: understanding why certain businesses operate on the self-insured retention system. It all comes down to dollars and cents.
Which is more expensive: paying for a comprehensive insurance policy that automatically covers all slip-and-fall or bodily injury claims? Or paying for some of those claims out of the corporate coffers? Large businesses with a predictable number of claims year after year often decide it’s more cost-effective to settle claims themselves below a certain limit–$100,000, for instance–rather than pay premiums for a policy that does it all.
“One of the purposes of self-insuring is to reduce your fixed costs and place within your control aspects of the business that are controllable, such as claims,” says Michael Gilles, senior vice president at HKMB Hub International.
For some companies, the costs associated with insuring “operational losses”–i.e. losses expected to occur on average every one to four years, often referred to as the expected loss layer by insurers–can really add up, says Garry McDonell, national director of Aon Reed Stenhouse’s global risk consulting division. “You will pay a premium to the insurance company for managing claims within the expected loss layer. That premium may be, on average, 30 or 40 per cent over the actual claims costs.”
For some, it’s a question of control: companies want to be able to decide for themselves when to settle, and for how much, managing the process according to their own corporate philosophies, rather than those of the insurance provider.
“They can be very flexible and use it as a customer-relations tool by being generous and liberal,” explains Michael Tinker, executive vice president of operations and claims at HKMB. “Or they can be tight… so that they’re not a target for future claims.” For example, fast-food companies tend to be tight, so they don’t become targets, he says. On the other hand, manufacturers with lower claims frequencies are often more generous to avoid negative PR.
Whatever the client’s corporate philosophy may be, brokers working for these big businesses need to understand numerous processes to help the clients decide how much risk they should consider retaining, and how to manage the claims process.
Actuaries and Accountants
An actuarial analysis is important, says McDonell. At Aon, actuaries often go back as many as 10 years into the client’s claims history to identify loss development and payment patterns to help the brokerage inform the customer on optimum retention limits.
Accounting skills are also vital, he says–they enable the brokerage to advise clients about the costs and benefits of various options. In addition to the actual claims costs, claims administration and management can be expensive and time-consuming. As part of an overall analysis it is important to determine if it makes more sense to have a team of claims management specialists on staff or outsource the work to a third-party adjuster (TPA). Which one works best will depend on costs, resource availability, types of claims to be handled, geography and the client’s corporate philosophy.
Even one bad year in 10 can result in millions of dollars of unbudgeted losses.
At Aon, the risk-management team also gets involved, helping clients analyze losses and loss causes to identify and reduce the risks that lead to losses. It is usually more cost-effective to avoid a loss than to manage it after the fact, but not always. That is why a premium analysis is a critical component to establishing the optimum retention, says McDonell. And the claims department helps clients write the policies and procedures supporting claims management: how they’re paid, how they’re monitored, and how the claims process is audited.
“We can come back and say, “Based on your risk, the optimum level of retention is $X,” McDonell says. “Buy insurance below that level only if the premium is equal to, or less than, $Y, otherwise you’re going to be trading dollars with the insurance company. If you take a higher retention, the insurance premium credit must be equal to, or more than, $Z, otherwise you are paying a premium for retained risk. It is critical to quantify the claims costs volatility, i.e. what could happen in a bad year. Even one bad year in 10 can result in millions of dollars of unbudgeted losses.”
The future is just as important as the customer’s claims history, brokers note. This means taking into account issues such as any expansion plans the client may have such as new stores for retailers or any merger and acquisition activity that could increase exposure.
Gilles at HKMB says it’s important for the brokerage to understand the customer’s sector. A retailer’s risks differ mightily from those of a manufacturer.
“It’s understanding the clients’ industry and having an idea of the types of claims and situations that they’re going to get involved in,” he says.
This might seem to preclude small brokerages from serving big businesses, but that’s not always the case, says HKMB’s Tinker. He points out that some small brokerages specialize in particular areas, providing claims-management advice to certain kinds of organizations. For example, some small brokerages target the public sector–municipal governments primarily, he says.
Organizations that opt for self-insured retention systems usually share one trait: they’re large. But the types of claims vary, involving various insurance products.
A typical general liability policy might respond to a slip and fall, a bodily injury, a product liability, or even a fallen product off a shelf. Other issues that can arise are errors and omissions for certain employees if their actions cause some injury to another party.
Brokerages in this line of business need to have a healthy appreciation for communication, say the experts. For instance, carriers should be kept informed, even if the customer decides to handle a claim under retention. Sometimes smaller cases can balloon beyond the retention limit, and it’s better for the insurance company to know the claim exists before the carrier has to step in.
The basic steps of investigating a loss can play a key role in reducing liability before the insurance company has to become involved. These can include things like checking if there are sweep logs, reviewing closed circuit television tapes, as well as determining if there are any third parties to whom liability can be shifted.
A broker’s experience with TPAs can also be important for clients that choose to work with an external adjusting team. The broker can play a key role in ensuring that the TPA’s investigation is progressing appropriately, meeting the time requirements that the client has stipulated.
McDonell says a significant number of Canadian businesses are choosing to self-insure.
“If you added up all the premiums related to commercial risks on a global basis, nearly one-third of that amount is in the alternative and self-insured market. It is not going to the insurance companies anymore because the companies either could not respond to the needs of the commercial client, or they responded in such a way that the cost was more than the commercial client could bear.” McDonell expects this trend to not only continue, but to accelerate.
But being “fed up” isn’t the same as knowing how to move forward on the path to retention. And when these big companies need help, it takes a knowledgeable broker with a breadth of experience to serve them, Gilles says.
“Every company is going to have a different pain threshold.”
Copyright 2011 Rogers Publishing Ltd. This article first appeared in the January 2011 edition of Canadian Insurance Top Broker magazine.