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Apr 8, 2010

Why Benchmark and Measure Your Risk Management and Insurance Plan

Accountability, Measurement, Predictability, Reliability.

How do you know when your insurance and risk management program results are best in class?

We've recently begun asking our friends in the business of running successful businesses how they measure the results from their existing insurance and risk management plans. We also asked them if they had any comparative data from which to compare their results against. Lastly, we asked them if they could financially quantify through improvements in EBITDA and or Earnings Per Share, the difference between their current program results, and the best possible outcomes from a new plan.

The findings were surprising and we thought you'd like to know. Here's some of the more intriguing answers.
  1. I don't know how to measure insurance and risk management costs other than the pure insurance expense.
  2. We never had any benchmarks, assessments, or studies completed to help compare our results against the best possible outcomes.
  3. We've never conducted a thorough risk assessment and don't really know some of the risks we face. Since we had never had a loss, it was not something we worried about until we found out the hard way.
  4. Our advisors provide us with the results of our programs, compare them against the best possible outcomes, and measure the difference between what we are doing, and what is possible.
Now we recognize that not everyone has blatant dissatisfaction with their risk and insurance programs, but many successful public and privately held corporations don't really measure their programs against a best possible case outcome.

Do you know what questions to ask your leadership team?

Here's a simple exercise you can utilize to help you better understand whether there is an opportunity to really improve on your plan results. Feel free to select the statement that best fits your perception of your organization.

(1) We conduct risk assessments often, and we identify and measure the risks, and compare the results from our plan periodically. I know how much my risk management and insurance plan costs and I know what it should cost if I had no losses in the program. I get detailed reports outlining the current plan against the best possible outcomes from the plan, and we compensate those in our firm who help us meet the best possible outcomes. I measure this difference every few years to see if I can improve upon my company's existing record. (92 Points)

(2) I trust others to complete this task within the company, and delegate this to another department. However, I've never studied this enough to really know if the impact to EBITDA, or EPS would be material. (75 points)

(2) I think we have an understanding of our overall plan, but couldn't tell you how much it costs, and what the potential impact that no losses would have on our EBITDA, and EPS. (70 points)

(4) We sometimes measure the results of our plan, and sometimes do not. We, however have never really benchmarked our plan against any types of best possible outcomes, therefore we don't know how to evaluate the potential plan improvement's impact on EBITDA. (65 points)

(5) I have no idea how to measure the best possible outcome against my current plan. (50 points)

Those who score 90 or above aren't necessarily never faced with risks, after all everyone is. However, they are well prepared to manage the risks efficiently, and have a solid understanding of what their best possible outcomes from risk management could be.

Scoring 70-90 can create unknown risks, but may also give you an opportunity to improve EBITDA and EPS if you are successful in improving the plan.

If you scored below 70, it may be time for a change in the structure of your plan.

Here are a few tricks on how to easily identify some simple measuring sticks for risk management.

If you are partially, or fully self insured, how do your actual losses accruing on your balance sheet compare to the expected losses in your particular business? How do your actual losses measure up against your competitors? By reducing losses and removing them over time from your balance sheet, would that free up valuable LOC's and or cash collateral? If so, how much? What would that impact be to EBITDA, and EPS?

If your workers compensation program is experience rated, what is your experience modifier? Do you know what your lowest possible modifier is? What would the difference between your current mod and the lowest possible mod do to your EBITDA, and EPS? Do you know?

By measuring, understanding and communicating your actual plan results against your best possible outcomes, the flow of information to the C level executive can help the executive determine if improvements in results from the risk management plan would produce significant improvements to EBITDA, and Earnings Per Share.