Assignment Six

Risk Control and Premium Auditing

Loss Prevention• A type of risk control that seeks to lower the

frequency of losses• Loss reduction – a type of risk control that

seeks to lower the severity of losses that occur• Risk control – a risk management technique

that attempts to reduce loss frequency and loss severity

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Goals of Insurer Risk Control Activities• Profit – underwriting decisions based on information – may

indicate need for nurses, ergonomic specialists, engineers, chemists

• Meeting customer needs – increased awareness of OSHA, Customer Products Safety Act, CERCLA, American with Disabilities Act– Impacted with liability judgments

• Comply with legal requirements – minimum level required by some states

• Humanitarian and social concerns – benefits society at large by preventing or lessening losses

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Earn a Profit• Underwriting – enables underwriters to make better

informed decisions and provide technical support• Marketing – often the difference between being accepted

or rejected, may offer tangible advice on improving safety

• Claims – may have engineering, mechanical ability above that of claims than can reduce loss

• Encourage insureds to improve risk control• Provide additional revenue source• Reduces errors and omissions claims

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Meeting Customer Needs• Pressures of legislation – OSHA, the

Consumers Products Safety Act, CERCLA, Americans with Disabilities Act

• Can create additional benefits– Enhance relationship with producers– Increase market share– Attract and retain higher-quality accounts– Help agents accomplish goals

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Comply with Loyal Requirements• Some states require minimum level• Texas – workers’ compensation• Some companies charge for service excess

minimum required

• Duty to Society– Provide financial resources to recover from

accidental losses

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Services Provided by Insurers• Physical surveys

• Risk analysis and improvement

• Safety management programs

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Conducting Physical Surveys• Evaluation of Loss exposures relating to – Fire, wind storm, water damage, burglary– Legal liability– Employee injuries

• Moral hazards• Morale hazards

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Recommendations• Written Recommendations– Conform to industry and regulatory standards– Practical– Address cost / cost benefits– Property valuations

• Assist underwriters and insured– Underwriter gains better understanding– Insured understands loss exposure– Insured confident of adequate recovery after valuation

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Risk Analysis

• Coordinated safety programs

• Technical risk-control information

• Fire protection systems testing

• Pre construction counseling

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Types of Loss Exposures Evaluated• Test and evaluate effects of noise levels• Appraise hazards to employees from solvents,

toxic metals, radioactive isotopes• Assist in design of explosion suppression

systems• Evaluate products liability loss exposures• Complex loss control problems

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Developing Programs

• Complete evaluation of insured’s operation

• Assist insured in establishing goals

• Selecting appropriate measures

• Monitoring

• Consultation – ongoing periodically

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Factors Affecting Service Levels• Line of Insurance

• Commercial insured size

• Potential legal liability

• Unbundled services

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Service Levels• Mostly commercial• Types of exposures – noise levels, toxic

metals, explosion suppression systems and fire extinguishing systems

• Potential legal liability – Nelson vs. Union Wire Rope Corporation 1994 use of disclaimers

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Cooperation Between Risk Control & Other Functions

• Underwriting• Marketing and sales• Premium auditing• Claims• producers

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Agents & Brokers• Agent and brokers – coordinate program

• Large brokers – provides service equal to that of large insurance companies–Must coordinate

• Unbundled – companies and brokers

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Premium Auditing• Obtain information with which to calculate

premiums and to establish future rates

• To determine the actual insurance exposure for the coverage provided and render a precise report

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Reasons• A variable premium base

• Exposure units

• Payroll, gross sales, area, receipts, admissions, vehicle, mileage, values, and more

• Difficulty in predicating actual number6 - 18

Reasons (cont.)• Determining correct premium

• Regulatory requirements – mostly workers’ compensation

• Collect ratemaking data

• Inhibiting fraud

• Reinforce confidence of insureds

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Process• Voluntary vs. Field Audits• Planning• Reviewing operations• Determining employment relationship• Finding and evaluating books and records• Auditing the books and records• Analyzing and verifying premium – related data• Reporting findings

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Importance of Accurate Audits

• To insured

• To insurer

• Financial position

• Customer retention

• Goodwill

• Efficiency

• Collections

• Insurance rates

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Premium Audit & Other Functions• Underwriting – proper classifications and price

• Account – desirability reflects management

• Marketing – may be only person from insurance company seen

• Claims – verify employment

• Risk control

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