Risk Management as a Strategic Business Unit


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Risk Management as a Strategic Business Unit

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