Companies pursue risk management plans to boost profits
- June 29, 2011
As the president and CEO of an architecture and engineering firm that designs U.S. embassies around the world, Michael W. Matthews understands the risks his company faces. Professional mistakes in his field can lead to monetary damages, injury and even death, he says.
To avoid those potentially catastrophic outcomes, Matthews’ Glen Allen-based firm, H&A Architects and Engineers, emphasizes risk management. That’s the practice of identifying and mitigating risks a company may face. Several H&A employees have attended seminars on the subject, and the firm’s professional-liability insurance broker and carrier “provides in-house training to our design and project management professionals,” he says. “It is critical that our employees understand our exposure to professional liability claims and how to mitigate those risks.”
Matthews’ focus on risk management has paid off. The company has faced fewer claims than many other firms. Plus having a good track record and participating in risk management training lowered its insurance premiums. “Our insurance carrier provides a discount of a couple of percent if a certain number of our employees take the courses they offer in risk management,” he says. In an economy still recovering from a deep recession, that’s music to a CEO’s ears.
Matthews isn’t the only CEO to see the financial benefits of a well-thought-out risk management plan. Today, many firms in fields such as law, engineering, construction and financial services are pumping up risk management strategies to protect their assets and reputation and to boost their bottom line.
Experts agree that implementing a vigorous risk management plan can lead to lower premiums, increased productivity from reduced claims and better quality control. “It’s hard to put a number on it,” says Charles Bolyard, chairman and CEO of MBP, a multi-disciplined construction consulting firm based in Fairfax. “But based on what we understand to be the types of premiums paid by firms with a high-risk factor, we save tens of thousands of dollars annually because of our risk management program.”
The savings can be even higher when companies consider their total cost of risk, says Dan Knise, president and CEO of Ames & Gough, a specialty insurance brokerage with headquarters in McLean. That cost — which includes insurance premiums and staff allocations in loss control and risk management, as well as legal fees, claims and settlement expenses — can be as high as 4 percent of revenues, and possibly higher.
“So for a firm with $50 million in revenues, that cost is $2 million,” he says. Now imagine the firm reduces its total cost of risk by 10 percent. “If a firm’s profit margin is 10 percent — pretty typical for an architect or engineer — this $200,000 risk cost savings would increase profits by 4 percent.” And if the firm reduced its risk costs by 25 percent, it could increase profits by 10 percent or $500,000.
That kind of savings would be attractive even in a good economy, but these days it can feel like finding a money tree in the accounting office.
The still recovering economy is fueling at least some of the growing interest service firms are taking in risk management, in part because the economic downturn has sparked an uptick in claims.
“In some instances, the economy may very well define the actual number of claims submitted on behalf of the employer,” says Steve Deal, the Norfolk-based regional CEO of USI Insurance Services for the Mid-Atlantic region. “This is especially true in the frequency of worker compensation claims. If a company is having financial issues and the employees fear a layoff, sometimes the number of trips and falls will escalate.”
Failed construction projects and bad real estate deals that end in costly litigation also have become warning signs about the dangers of facing risks unprepared. “Banks used to say, ‘Let that go,’” Knise says. “Regulators now say, ‘Go after it,’” and attorneys or design firms associated with the failed project or transaction can find themselves swept into a lawsuit.
Likewise, a company’s willingness to carry higher deductibles in exchange for lower premiums during the recession has underscored the value of risk management. Before the recession, USI didn’t automatically offer quotes that showed options for higher deductibles, Deal says. These days, it does.
Firms increasing their deductibles “realize how important risk management is as the first dollars spent are theirs,” Knise says. “Many architects and engineers in the $20 million to $60 million revenue range may have professional liability deductibles of $100,000 to $500,000 per claim.”
The interest in risk management predates the recession, of course. Knise points to Arthur Andersen’s collapse in 2002 as “a wakeup call for professional-service firms.” The accounting giant surrendered its CPA licenses after being found guilty of criminal charges related to its audits for the bankrupt Enron Corp. The U.S. Supreme Court later overturned the verdict, but the damage to the firm’s reputation was fatal. In the wake of the Enron scandal, “people realized they were vulnerable as professionals,” Knise says.
John Stanchina, president of Rutherfoord, a Virginia-based insurance broker that became a Marsh & McLennan Agency company last year, traces the interest in risk management even further back. “We’ve seen a growing interest in risk management in all industries in the last 20 years,” he says. “Firms recognize they can improve productivity and profitability. We see this as an evolving trend, not a new trend.”
Today’s marketplace is distinct from the past in a key way, though. “All firms face greater risk today than they did 20 years ago, due to the U.S. litigation environment, global competition and the cost of capital,” Stanchina says. In response, many firms have become more aware of the risks they face and even more inclined to emphasize risk management.
“We’re seeing a lot more legal contracts being drawn up by firms that used to work on a handshake,” says Angelina Fair, manager of claims and risk management for Roanoke-based Chas. Lunsford Sons & Associates, an insurance broker that opened its doors in 1870. “Now you draw up a contract instead of picking up the phone.” And the risks associated with these contracts can often be just as much about what is not written in the contract as what is, she adds. “This is why Lunsford reviews these contracts for clients free of charge.”
The number of professional firms working internationally has made business more complex and riskier, too. “We have to ask a lot more questions to understand what clients are doing and how they’re operating to cover a claim in the event something happens,” Deal says. With the threat of Somali pirates off Africa’s east coast, for example, insurance coverage on products shipped to Madagascar will be more expensive than it would be on products shipped to London. “Pricing has gotten very scientific,” Deal adds.
And the sheer size of many business deals today makes participants painfully aware of the risks they’re facing. “A big deal in the old days could be $1 billion,” Knise says. “Now, it’s $40 billion. With big numbers come big risks.”
‘Not a passing trend’
All that interest in risk management has changed the way some insurance brokers work. “If you go back 15 years, the focus was on insurance procurement,” Knise says. “That has shifted heavily to risk management” as companies focus on “managing risk better so insurance becomes a backup and not the main risk management vehicle.”
That shift has affected some brokers’ workload. While Knise’s firm gets paid primarily for obtaining insurance coverage for its clients, for example, “we spend more hours on risk management” than procuring insurance, he says.
Likewise, USI conducts seminars and webinars for its clients, as well as producing white papers on risk-related topics. “We’re doing more webinars than anything else,” Deal says.
Rutherfoord has diversified heavily into risk management as well. “Twenty-five years ago, insurance procurement was a big chunk” of what the firm did, Stanchina says. “But over the years, we’ve become a diversified firm, based on our clients’ needs.” While it still handles insurance procurement, it now also offers guidance in “risk prevention, environmental consulting, surety, executive liability and employee benefits consulting,” he says.
With so much at stake, risk management will increasingly play a central role in insurance brokerages as well as professional service firms, experts say. “Risk management isn’t a passing trend,” Fair says. “It’s here to stay because it has become ingrained in the way people do business now. The fact that an insurance firm has an entire risk management office shows that.”