Managing Insurance Costs: It Isn’t Just Getting a Lower Premium

As managing partner of GGG and the Turnaround Authority, I get the pleasure of providing guest posts by our other partners. The following post is by our Partner, Vic Taglia.

One important job of managers is examining their business’s risks to determine which risks they can absorb and which they should pay someone else to bear. Insurance premiums represent just one part of your company’s cost of mitigating risk, and a key element of risk evaluation is the selection of deductibles in a property policy. Another is workers’ compensation.

Some companies try to minimize the cash flow impact of workers’ compensation premiums by selecting more aggressive loss retention or self-funding policies, generally with some stop-loss provisions. The insurance company acts as the claims administrator, charging a percentage of incurred claims for administrative costs, and a premium for the stop-loss coverage. This provides an immediate cash flow benefit because there are very few claims processed in the first several months of any new policy.

But beware: these self-funding or large deductible plans are suitable only for companies that have the ability and discipline to reduce the first risk of loss; i.e., they have to avoid accidents and losses in the first place and on their own. Workers comp claims can take a long time to develop and close, and as a manager you want to avoid learning about loss development factors, paid versus incurred claims, collateral pledges and releases and actuarial reserves.

Limiting Workers Comp Claims

Most of the larger workers’ comp carriers have experienced loss prevention departments that love to visit their clients to help avoid accidents. They will encourage you to prepare and adhere to a corporate safety program, and establish a safety committee with regular meetings and some power to enforce safety discipline.

Your safety program will probably include a drug-free workplace policy and an effective back to work/limited duty process. You will get annual MVRs for all employees driving on company business.  You will hold periodic safety meetings, provide bonuses for eliminating workers comp claims and enforce safe operations throughout the company. This approach isn’t just good for your wallet but for your employees.

A good insurance advisor will also help you identify and examine other risks to your business. Here in Florida, wind and flood coverage is difficult to acquire or very expensive. Maybe you can live without the property coverage, but maybe you need business interruption insurance or difference in conditions coverage.

A Fruitful Insurance Relationship

Insurance folks talk about relationships all the time. I used to be skeptical, but no longer. Insurers want to deal with insureds on a long-term basis – not with someone who will leave to save pennies.  And I encourage you not to leave for pennies. With the right carrier, you will get those pennies back over the long term, if not in paid out claims then in time saved dealing with claims and consistent productivity due to reduced accidents and claims.

As a point of full disclosure, I have changed carriers, brokers, agents and consultants many times, but only after I determined that the incumbent either did not or could not offer the coverage, terms and service I wanted.

Many years ago, I put my company’s insurance program out to bid to two national brokers. The incumbent returned with lower premiums, better coverage and an overall more attractive program with some new carriers. The competitor offered a three-year program that combined workers comp, property and general liability in one policy. This had the potential for significantly lower overall costs if we had no losses.

I told my boss that we had plenty of other risks in our business (patent litigation, limited profitability, approaching down cycle in our industry, etc.) and that if we could find someone to take some of our risk, we should. He agreed, and we continued with the incumbent.

So my advice is to identify what risks you have, what risks you can afford and how much you can spend (time and money) in minimizing your potential losses. Allow that information to guide you when selecting an insurance provider for your business – not just lower premiums.

What are your experiences with business insurance? Do you have questions about the risks you’re facing and how to mitigate them? Ask in the comments below.

The Wonderful Ways of the White Board in Business, part 2

Last week we discussed the advantages of using a whiteboard in business timelines, and after the positive feedback I got, I wanted to share another anecdote.

The Set-up

Company A is in Orlando. Company B is in Minnesota.

Company A buys Company B.

The Plan

Company A decides to close down the factory of Company B and move its operations to Orlando – you know, to consolidate things.

Their plan was to shut down a factory in Minnesota, drive its equipment and operations to Orlando, set it back up in an inadequate space, train all the personnel in the new manufacturing process and be fully operational – without disrupting their supply line, output, customer service or other operations – over the course of a three day holiday weekend. I repeat: a three day holiday weekend.

As you can imagine, I told them they were crazy. Loony. Bonkers. No way. Oh, goodness.

The Problems

1. The most glaring problem (among many) that I saw was that Company A had no inventory built up to handle orders if the production line didn’t come up Monday morning. And as far as I was concerned there was no way that the production line was going to be up on Monday morning.

2. There was also no mind being paid to the fact that the assembly line personnel in Orlando couldn’t assemble what was being done in Minnesota. It wasn’t so far from their core competency, but it certainly required training and oversight. Their plan was to send one guy from MN to FL to teach people how to put the widget together in three hours. What if something happened to this guy? What if the entire crew didn’t pick this up in 3 hours?

3. The capacity in the Florida location was full! Where were they going to put all of their new equipment? There was no time to find a new location

The Solutions

My solution to this insanity was mapping out the process of moving and consolidating this business on the whiteboard as a 2 month timeline. By doing this, I could not only identify all of the steps necessary and include everyone’s responsibilities to make this happen efficiently and effectively but also I could show them why and how their initial 3-day plan was asinine.

1. I built them a 45-60 day plan during which time their primary goal was to build up inventory, running overtime at the Minnesota plant, so that when they closed the production line they had a full 30 days to get operational in Florida.

2. The Orlando crew needed to be properly trained. I suggested that they send the factory workers in Orlando to Minnesota to watch the process there for a few days. Company A complained about not having the $5000 to do this, but if their plan didn’t work they would lose millions! Penny wise and pound foolish, if there were ever an example.

3. With two months for this process to take place, there was now adequate time to find a suitable location at a reasonable price for the Minnesota factory to be relocated in Florida. Three days, I fear, would not have sufficed.

I’m pleased to say that ultimately Company A listened to me, and they were successful. Without the whiteboard, though, I would never have been able to make my case. I literally saw the aha-ing happen all over the faces of Company A’s execs when I drew up their plan and my plan on a whiteboard.

One thing I always do with my whiteboard is take a high resolution picture; I blow that up, print and study it so that I can re-explore my logic and see what I may have gotten wrong. I would love one of those white boards that digitizes your notes, but I guess that’s the next step!

What kinds of tools do you find most effective in allowing you to successfully manage your business responsibilities?