Risk Management as a Strategic Business Unit

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