Risk can be controlled to a greater degree than many imagine. However, this requires a holistic approach to risk management, including vision and support from senior management, a commitment to reducing accidents before they happen and aggressively managing those losses that do occur.
By Chris Mikolay
Ensuring the safe collection of every route should be a top priority in the waste and recycling industry. Yet, even with the most sophisticated technologies and best risk-management techniques, bad things can happen to good people鈥攐r good operations. Waste operations are an inherently risky endeavor, and properly managing its risk is no easy task, which can be puzzling given the vast array of insurance and risk financing options. Smart fleet owners and executives should take the time to properly understand: 1) the variety of ways in which risk can be transferred, 2) when it should be retained and 3) how various risk-financing techniques affect a fleet鈥檚 cash flows and bottom line.
Alternative Risk Transfer Programs
An alternative risk transfer (ART) program, also known as captive insurance, is a program created specifically to insure only the risks of a single company or a defined group of companies. Once only available to very large firms, ART program participation has grown.
Today, ART programs insure everything from waste operation鈥檚 liability to workers鈥� compensation, and some group programs will insure fleets with as few as 30 power units.听 In an ART program, the participant pays a premium similar to a guaranteed-cost policy, but a portion of that premium is designated to pay for expected losses up to a certain limit. If the participant has fewer losses than expected, part of the premium may be returned, along with any investment income accrued. Conversely, if losses exceed expectations, the participant will pay additional premium up to a specified maximum. However, unlike traditional insurance products, ART premiums are not determined by the whims of the insurance market, but largely by the individual waste operator鈥檚 loss experience. For better operators, this means the long-term cost of risk can be substantially lower and more stable than if the participant had been insured with a more traditional product, and it is a primary reason why better operators continue to migrate to this insurance option.
Generally speaking, companies with cash flow concerns might find large deductible policies to be the most attractive short-term option for reducing upfront premiums and alleviating immediate cash flow concerns. However, fleets must consider the 鈥渢otal cost of risk,鈥� including policy premium, deductible payments and, importantly, collateral requirements. For companies in a stronger financial position, the long-term stability of ART program pricing and lower collateral requirements make this form of insurance an attractive way to control total cost.
Navigating this Field of Insurance
However, ART programs are not for everyone. To work properly, a participant must have a longer-term vision, partner with insurance companies and agents that have expertise in alternative risk products and, above all, understand the product.
There are many myths and misconceptions about alternative risk and navigating this field of insurance requires expert and unbiased advice. First, find an insurance agent who understands ART and has access to these solutions. Second, when presented with options, demand transparency from the agent and insurance carrier about how premium dollars are spent, what the best and worst case claims scenarios are, and how premium and collateral are to be returned. Finally, when exploring a group option, ask for data highlighting past financial performance and speak with current members about their experience in the program.
Turn Risk into a Competitive Advantage
In addition to exploring an ART insurance option, there are other important ways for waste operators to turn risk into a competitive advantage. I have observed through the years in speaking with hundreds of transportation company executives two distinctly different mentalities when it comes to insurance coverage: some buy insurance, others manage risk. There is a world of difference.
To illustrate, let鈥檚 consider two fictitious fleet companies鈥擱andy鈥檚 Recycling and Dave鈥檚 Disposal. Both are experienced operations. Both face a myriad of challenges trying to run a profitable company in an ever-changing industry. Then, there is the question of fleet insurance.
Randy likens insurance premiums to fuel costs. He may look for the lowest price, but he basically views insurance as a commodity beyond his control. He also believes accidents are more or less random occurrences. And losses? Just a cost of doing business. As you might expect, Randy鈥檚 annual insurance renewal is one of the most stressful parts of his job.
Dave鈥檚 Disposal, by contrast, decided to take control over their risk. They took steps to reduce accidents and Worker鈥檚 Compensation claims鈥攕uch as using onboard video cameras and pre-hire physical abilities testing鈥攚hich greatly improved their safety program and reduced the frequency of workers鈥� compensation claims. Dave also challenged his insurance broker to help him control losses and fight claims more aggressively.
These efforts not only helped Dave鈥檚 Disposal drive down their total cost of risk, but they also successfully turned that risk into a competitive advantage. The company is now positioned to thrive in the future, while companies who leave risk management to chance will continue to struggle.
Take a Proactive Approach
A disciplined, proactive approach to embracing risk is not just for made up companies in a magazine article. It is a proven strategy that today鈥檚 operators need to seriously consider in order to stay successful.
It may require a bit of vision and support from senior management, but turning risk into a competitive advantage is entirely possible. Here are a few steps many successful operators have taken to make it happen:
- Control workers鈥� compensation costs with a comprehensive return-to-work program. It is a win-win for the company and the injured employee. Challenge your broker and insurance carrier to design and implement the program if need be.
- Avoid 鈥渉iring鈥� workers鈥� compensation claims. Use pre-hire physical abilities tests, which have been shown to dramatically reduce claims.
- Use onboard video systems. They typically pay for themselves in a relatively short time thanks to fewer accidents, improved driving skills, and lower fuel and maintenance costs. They also provide an irrefutable witness in the event of an accident.
- Maximize your insurance carrier鈥檚 loss-control services. Many operators are not aware of the innovative loss-control programs available. Worse yet, some view loss-control visits as a nuisance. The most successful operations have learned to take advantage of the services provided by their insurance carrier.
- Take the long view when choosing insurance. Determine the most efficient way to finance risk over a three- to five-year period. A short-term insurance buying decision often leads to large collateral burdens, poor claims outcomes and sudden premium increases at renewal.
These are just some of the ways good companies turn risk into a competitive advantage. Risk can be controlled to a greater degree than many imagine. However, this requires a holistic approach to risk management, including vision and support from senior management, a commitment to reducing accidents before they happen and aggressively managing those losses that do occur. | WA
Chris Mikolay is Vice President of National Accounts for National Interstate Insurance Company (Richfield, OH), a specialty property and casualty insurance company that focuses on the transportation industry. Chris joined National Interstate in 2006. He can be reached at (800) 929-1500, ext. 1407, or via e-mail at [email protected].听