Managing Risk in Risky Times

Tips to improve your insurance program in an economic downturn

Robert T. Lipps | posted 12/04/2009

Every general counsel, chief financial officer, and risk manager cares about the cost and quality of their ministry's insurance. While health and other employee insurance costs are often the second or third largest expenditure for ministries, business coverage like workers' compensation, property, general liability, directors' and officers', abuse and molestation, auto liability and property damage, Internet, and foreign liability insurance can be equally burdensome and confusing to manage. Whatever was difficult for ministries to pay for and understand five years ago is all the more difficult today.

Here are some insights and tips to help reduce your overall cost of risk while improving the quality of your business insurance program.

Focus on more than premiums

Premiums are usually the largest insurance-related cost. But there are several other things to consider when thinking about your overall cost of risk:

• Claims: Even ministries that are fully insured often forget the hard costs involved when a claim occurs. Deductibles, amounts exceeding the policy limit, future premium, and deductible increases due to the claim are among a few high costs that should be accounted for as well.

• Administrative time: It is important to partner with an insurance broker who not only can help you identify exposure and determine proper coverages, but can also be an effective outsourced part of your risk management program, assisting with contract review, loss control, and processing claims when they occur. All of these functions save you valuable staff resources.

• Fully insured vs. self-insured: While fully insured programs transfer most or all of the risk of loss to the insurance company, they can also be very expensive given the nature of the risk, the loss control program in place, and the organization's loss experience. Self-insuring or partial self-insuring is a valid way to recapture excess premium while having proper resources to pay for claims when they occur. Such risk retention can take various forms, such as high deductibles, quota share, lowering limits, risk retention groups, and captives.

• Being under- or over-insured: Not having enough coverage can result in losses that are greater than the insurance policy limit, which may result in money coming directly out of your ministry funds. On the other hand, over-insuring is a waste of money. Find the right balance that makes sense for your particular needs.

• Umbrella coverage: Umbrella policies should be strategically coordinated with their underlying coverages. Otherwise, an absence of coverage or gaps in coverage may result in affecting premium cost as well as the cost of claims when losses occur.

• Combined coverages/package policies: Combining as many coverages as possible into one comprehensive policy may reduce the amount of minimum premiums required for each policy and help your ministry coordinate coverage terms.

There is more to risk management than buying insurance. Enterprise Risk Management (ERM) is a comprehensive method of assessing your ministry's risk at a more fundamental level that addresses both insurable and non-insurable risks (changes in law, currency devaluations, market changes, and so on). An ERM assessment focuses on three things that should affect your ministry's long- and short-term strategic plan:

1. Identifying exposures

• An ERM program will help your ministry know the risks it faces, the probability and frequency of a loss occurring, and that loss's impact on the ministry. Not all losses are insurable, and many could affect the ministry's ability to continue. Know your ministry's specific risks, mitigate them, and prepare for them to materialize.

• Implementing a loss-control study and safety program are concrete ways to reduce the likelihood of a loss occurring and the extent of a loss should one occur. These are proven methods to lower your organization's overall cost of risk and, in many cases, can be done by your broker at no cost.

• Oftentimes you can insulate your ministry from being responsible for losses that occur or, at the very least, limit your liability by properly structuring your legal environment. Review your contracts with your attorney and your insurance broker to make sure both legal and insurance issues are strategically addressed before executing a contract.

• Reassess your property values and adjust insurance limits respectively. With property values declining over the past two years, lowering your limits to match depreciated values is a simple way to save premium dollars. Your broker will advise you on how to approach this idea.

• Review your coverages to avoid duplicate coverage or unknown gaps. Too often, ministries that use multiple brokers and insurance carriers find gaps in their coverage or duplicate coverage because no one broker is responsible for the overall insurance program. In addition, policy language can vary significantly among carriers, so it can often be difficult to coordinate an efficient program.

Ministries that use multiple insurance carriers often find themselves with either gaps in coverage or duplicate coverage because no one broker oversees the overall insurance program.

2. Addressing exposures

• Mitigation: Ministries face risks such as claims from worker injuries, volunteers or visitors, auto accidents, damage to property, and many others. Many of these exposures can be mitigated through proper loss control and safety programs or by changing the way the ministry operates.

• Elimination: Some risks cannot be avoided or even mitigated if their probability of occurring is high enough. The ministry program or activity might simply need to be eliminated.

• Acceptance: When risks to the ministry cannot be mitigated or eliminated, plan to retain those risks or contractually transfer them to another entity. Risks can be retained by becoming self-insured, for example. Or, risks can be transferred in several ways. The two most common ways are through purchasing an insurance policy from a carrier or through a program contract relating to a vendor or other party.

3. Responding to claims

• Control Claims: Be sure your broker has an active claims-control program and a team member assigned to your ministry before accidents happen. A claims control specialist will come along side and expedite the settlement of outstanding claims and help you control the outcome of the claim, all of which impacts your future premiums and ability to obtain insurance.

• Be proactive: Sitting back and waiting for claims to mature and settle can result in excessive claims settlements. In addition, collateral damage to the ministry, such as reputation and use of staff resources, can increase costs in other ways.

Strategic alliances

Partnering with an insurance professional has many advantages. Communicate your risk management issues to your broker to find out what program works best for you. Keep in mind that insurance companies generally look more favorably toward organizations that are willing to share in the retention of risk. Here are some other things to consider:

Implementing a loss-control study and safety program are concrete ways to reduce the likelihood of a loss occurring.

• An insurance broker is different from an insurance agent. Insurance brokers have a duty of loyalty to you, not to an insurance company. Agents have a duty of loyalty to their insurance company, not to you! Choosing the right broker who understands your ministry gives you access to many insurance companies, not just the one with which an agent is aligned.

• Make sure the broker understands not only your ministry but also the broader ministry environment, so they can meet your current insurance and risk management needs, as well as help you grow and move through future challenges.

• Work with a broker that has "bench strength"—that is, a depth and breadth of professional expertise to meet your current and future needs. Partnering with the right broker will drive you to an overall lower cost of risk and more effective risk management program.

• Work with ministry affiliates or join with like-minded ministries. By aligning your ministry with others, you may find an opportunity to lower your cost of risk and achieve some economy of scale.

As with a lot of things, regular communication is ultimately important. Continuous price shopping doesn't necessarily lead to lower costs, but staying in contact with your insurance broker and insurance carriers will help establish long-term relationships that bring favorable terms to your overall risk management program.

Robert T. Lipps, JD, CPA, is Executive Director of Lockton Alliance for Ministry Protection. His extensive experience as a CFO of a major Christian nonprofit organization led him to serve ministries through strategic risk management. He and his wife live in San Francisco. Lipps can be reached at BLipps@Lockton.com.

LAMP:

Lockton Alliance for Ministry Protection

Headquarters Kansas City, Missouri

Founded 1966

Chairman David M. Lockton

Key Services Offered LAMP is a specialty group within Lockton, the world's largest independent, privately owned insurance broker. LAMP delivers insurance, risk management, and employee benefits services globally to midsize and large nonprofit organizations, church denominations, parachurch organizations, and related businesses.

Employees Lockton employs more than 3,800 associates in 49 offices throughout the world.

Mission Lockton's mission is to be the worldwide value and service leader in insurance brokerage and risk management services. The company motto, We Live Service!®, coined by David Lockton, remains the focus for all Lockton associates as it was when the company was founded as a home-based business over 40 years ago.

Clients World Vision, Young Life, the Foursquare Church, Wycliffe Bible Translators, Youth for Christ, Awana, InterVarsity, and more.

WebsiteLockton.com