Fundamentals Of Risk Management For Cf Os


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This is a presentation on the fundamental of risk management for CFOs of furniture manufacturing concerns. This was done in conjunction with the American Home Furnishings Alliance.

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Fundamentals Of Risk Management For Cf Os

  1. 1. Fundamentals of Risk Management for CFOs--Unlocking Hidden Value<br />
  2. 2. Background—Furniture Industry<br />Furniture Manufacturers are facing grueling, unrelenting economic pressure to survive. In the process, the industry continues to contract resulting in the loss of thousands of jobs<br />To survive, furniture manufacturing companies are actively trying to discover new efficiencies in their business processes<br />Aggressively managing Total Cost of Risk can potentially provide currently unrecognized operational and economic benefits to participating companies<br />
  3. 3. Background—Insurance Marketplace<br />The insurance market continues to act in a somewhat irrational manner. Eventually there will be a shift towards a harder market<br />Higher premiums<br />Higher deductibles<br />Insurance carriers impacted by:<br />Poor underwriting performance in 2008<br />Lack of investment income to offset underwriting results<br />Lack of available capital from outside investors to bolster balance sheets<br />
  4. 4. Risk Management Techniques<br />Risk Identification<br />Examples of types of risk: first party, third party, property, management liability, financial, human resources<br />Risk Analysis<br />Frequency of risk, severity of risk, impact on business continuity<br />Risk Treatment<br />Avoid it (discontinue the practice)<br />Control it (engineering, administrative, operating practices)<br />Transfer it (contractual risk transfer, financial risk transfer)<br />
  5. 5. Total Cost of Risk<br />
  6. 6. Total Cost of Risk<br />Direct losses<br />Losses of any type (workers compensation, third party liability, property, etc…) that are borne by the company or transferred to an insurance carrier<br />Indirect losses<br />“soft losses” that are due to loss of productivity, overtime, delay in delivery, loss of customers, etc…<br />Financial Risk Transfer Costs<br />Insurance premiums paid to insurance carriers to transfer risk<br />Broker/Agent Fees and Commissions<br />Sales commissions or fees paid to brokers/agents for the placement of insurance and delivery of risk management services<br />Internal Administration Costs<br />Internal expenses associated with safety/claims/risk functions<br />
  7. 7. Today’s Focus—Basic Operational Property/Casualty Risks<br />Employee Injury/Workers Compensation<br />Third Party Injury or Property Damage/General Liability <br />Third Party Injury or Property Damage/Auto Liability<br />
  8. 8. Risk Identification<br />Risk Identification<br />What types of accidents/incidents are we experiencing or have we historically experienced?<br />What types of accidents have occurred most frequently?<br />What types of accidents have created the greatest expense?<br />Can I pinpoint these losses to specific operations or types of jobs?<br />Key reference points:<br />Internal Accident/Incident Investigations<br />OSHA Injury Reporting Logs<br />Insurance Carrier Loss Runs (all lines)<br />Insurance Carrier Safety/Loss Inspection Reports (all lines)<br />
  9. 9. Risk Analysis<br />Risk Analysis (Financial)—Basic Questions<br />What is my workers compensation “loss rate” per $100 of payroll?<br />What is my workers compensation experience modification rate? Is it correct?<br />What is my company’s loss ratio (losses compared to premium?)<br />What is the cost of a day away from work or a “light duty” day?<br />How does my risk management program’s performance compare to my peers?<br />What is the financial impact of losses on our business’ financial performance? How much do we have to sell to offset our annual Total Cost of Risk?<br />
  10. 10. Risk Analysis<br />Risk Analysis (Financial) – Some Basic Examples<br />Calculation = # of claims (or lost workdays) X 200,000 divided by actual hours worked for the period<br />This measurement allows you to compare to your peer group in these categories<br />
  11. 11. Risk Analysis<br />Risk Analysis (Financial)—Basic Examples<br />Workers Compensation Carrier Book of Business Statistics<br />Top 5 Loss Areas # Cases % Total Incurred Average % Total<br />MATERIALS HANDLING-. .. 887 25.34% $4,609,879 $5,197 28.28%<br />SLIPS AND FALLS-SAM... 361 10.31% $2,665,610 $7,384 16.35%<br />REPEATED TRAUMA-UPP .. . 290 8.28% $2,164,979 $7,465 13.28%<br />STRUCK BY/AGAINST 818 23.36% $1,738,407 $2,125 10.66%<br />HAND TOOL-MANUAL AN . .. 401 11.45% $1,339,745 $3,341 8.22%<br />Statistics from a national workers compensation carrier based on 3,501 claims over a three year period<br />This measurement allows you to compare the types and average costs of claims to your peer group. It also may help you focus prevention efforts<br />
  12. 12. Risk Analysis<br />Risk Analysis (Financial)—Basic Examples<br />Profitability Analysis based on Annual Sales of $24MM <br />At 5% Profit Margin<br />Total Incurred Workers Compensation Expense = $100,000<br />Total Incurred Expense x Loss Development Factor = $200,000<br />Indirect Cost of Accidents = 2X TI Cost of Accidents = $200,000<br />Total Accident Costs = $400,000 (Developed Costs + Indirect Costs)<br />Annual Sales = $24MM<br />Total Sales Required @ 5% margin to Offset Lost Profit Due to Accident Costs = $8MM<br />Months of Production Required to Offset Accident Costs = 4months<br />This measurement allows you determine the “breakeven” period for your annual loss costs and how the affect profitability<br />
  13. 13. Risk Analysis<br />Risk Analysis (Operational)<br />How does Risk Management “happen” around here? Is it intentional or passive? Are our results a matter of discipline or luck?<br />Examples of some key questions to ask:<br />How are risk and safety issues managed on a daily or routine basis?<br />Are roles clearly defined for each area/level of management?<br />Are those responsible trained and able to perform their roles?<br />How is performance measured?<br />How is performance rewarded?<br />
  14. 14. Contractual Risk Transfer<br />Concept<br />Allows companies to contractually transfer certain types of risks to third parties<br />Key Issues<br />Companies may unknowingly or passively accept risk through contractual indemnification/hold harmless provisions with subcontractors, dealers, vendors, or suppliers<br />Companies may miss opportunities to contractually transfer risk to subcontractors, dealers, vendors, or suppliers through appropriate indemnification provisions<br />
  15. 15. Contractual Risk Transfer<br />Analysis<br />Develop list of subcontractors, vendors, suppliers, and dealers<br />Review copies of subcontractor, vendor, supplier, and dealer agreements for appropriate indemnity/hold harmless provisions <br />Potential Corrective Actions<br />Contractually establish third party insurance requirements to ensure each third party’s ability to respond to indemnity and hold harmless agreements<br />Establish a Certificate of Insurance program to ensure each third party has appropriate insurance policies and limits in place<br />
  16. 16. Financial Risk Transfer<br />Concept <br />Allows companies to transfer certain financial risks to third parties designed to bear risk (insurance carriers)<br />A general rule of risk transfer is to retain frequency and insure against severity<br />Key Issues<br />Companies may be over or under insured depending on their ability and appetite to retain risk<br />Companies may not have the benefit of performance based insurance programs<br />Companies may be exposed to unidentified coverage gaps<br />
  17. 17. Risk Retention/Risk Transfer Decision Grid<br />
  18. 18. About Praxiom<br />Praxiom is a professional outsourced risk management firm that provides:<br />Risk assessment<br />Risk control<br />Claims management<br />Review of contractual risk transfer<br />Assistance in the design and placement of financial risk transfer<br />Praxiom’s risk managers have a deep understanding of the furniture manufacturing industry having served as internal risk managers for some of the industry’s leading companies<br />
  19. 19. About Praxiom<br />Praxiom is well known to AHFA and several of its member companies through the collaborative development of AHFA’s ISP program<br />Praxiom is proud to be an AHFA Supplier Member<br />
  20. 20. Managing the Total Cost of RiskThe Praxiom Service Model<br />Step One:<br />Risk Management Baseline <br />Risk Assessment Report<br />Site visit(s)<br />Management and Employee Interviews<br />Review of Processes /Procedures/Documentation<br />Analysis of Prior Losses to Determine Loss Trends<br />Risk Map of Current Risk Transfer Program Structure and Coverages<br />Policy review by line of coverage<br />
  21. 21. Managing the Total Cost of RiskThe Praxiom Service Model<br />Step One Deliverables (from Praxiom)<br />Written Risk Assessment Report<br />Performance Metrics (including certain financial metrics)<br />Identification/Quantification of loss frequency/severity drivers<br />Identification of management opportunities<br />Summary of Key Findings (Issues, Implications, Interventions Format)<br />
  22. 22. Managing the Total Cost of RiskThe Praxiom Service Model<br />Ongoing Risk Identification<br />Ongoing Claims Management<br />Ongoing Contractual Risk Transfer <br />Non-Insurance Risk Transfer to and from Third Parties<br />Ongoing Financial Risk Transfer<br />Assistance in the design and placement of insurance programs<br />
  23. 23. Participating AHFA Member Benefits<br />Clear identification/reduction/mitigation of actual and potential risk exposures through the use of professional outsourced risk managers to assist in management Total Cost of Risk<br />Professional baseline assessment<br />Comparison to norms and best practices<br />Agreed upon risk management action plan with 360 degree performance accountability<br />Quantitative performance measures/results<br />Ability to customize service platform based on individual company need<br />
  24. 24. Participating Member Benefits<br />Ability to make quantitative, informed decisions regarding risk retention and risk transfer<br />Structured fee compensation<br />Complete neutrality during financial transactions<br />Fees based on each company’s individual platform utilization<br />Potential to improve operating efficiencies and profit margins through improving Total Cost of Risk (TCOR)<br />
  25. 25. Interested in a Complimentary Baseline Risk Assessment?<br /> Basic Qualifications:<br />Must be an AHFA Member in good standing<br />Must be serious about committing to improve your Company’s Total Cost of Risk<br />Must be willing to consider new/different risk management strategies and tactics<br />Contact Bill Perdue at AHFA to arrange an individual conference with Praxiom’s Team<br />