By Sharon Rowell,
Director of Premium Audit, Injured Workers Insurance Fund, Maryland
It is universally understood,
that every profit or nonprofit organization faces some form of risks
as in integral part of doing business.
As such, due to the presence of risks, the potential for loss
is also a present and ongoing factor of doing business.
Accordingly, the workers’ compensation carriers also face
such risks. Risks generally
can be defined as the possibility of suffering from harm, danger or
loss. For workers’
compensation insurance carriers risks also include the
unpredictability of environmental or organizational variables that
impact corporate performance.
Today, what are some of the major
risks facing workers’ compensation insurance carriers?
1)
Is
it the global financial crisis and the weakening economy?
2) Is
it the impact the U.S. labor market trends are predicted to have on
workers’ compensation exposure?
3) Is
it the impact of various U.S. legislative measures resulting from
the recession that may present specific threats to the workers’
compensation insurance carriers?
4)
Is
it grossly incorrect pricing and providing coverage for undetected
exposure?
5)
Is
it failing to maintain compliance with regulatory controls?
6)
Is
it having inadequate data security?
7)
Is
it being severely stagnant in premium growth?
8)
Is
it having the inability to maximize cost containment for non-claim
related costs?
9)
Is
it not having an ability to assess the probability of catastrophic
losses?
10)
Is
it the impact of the projected increases in workers’ compensation
fraud (i.e., misclassification of workers/independent contractors)?
Currently, for workers’
compensation insurance carriers all of the above may be just some of
the major risks that they are facing which are inherit to the
property and casualty insurance industry. Although risks are a part of doing business, they too can be
effectively managed in order to help organizations achieve optimal
performance. As such,
enterprise risk management (ERM) has been noted as one of the most
effective tools which is currently utilized to assists workers’
compensation insurance carriers in managing their risks. Overall,
ERM can be defined as the systematic process of establishing a
risk-aware culture that utilizes the appropriate tools to
consistently identify and manage as well as measure risk or risk
correlations. More
specifically, ERM is integrated with a business at all levels and it
is a process of identifying key business risks and opportunities for
workers’ compensation insurance organizations. In addition to risk identification ERM also involves
assessing business risks and opportunities while evaluating their
ability to help workers’ compensation insurance carriers to
maximize their value.
There are many risk management
tools/methodologies/practices available to assist workers’
compensation insurance carriers with ERM. The ERM
tools/methodologies/practices offered generally
involve the basic ERM cycle as follows.
ERM is a process of methodically
and comprehensively indentifying critical risks; quantifying the
impact of said risks and then implementing integrated strategies to
“maximize the enterprise value”. It should be noted that as a
part of ERM, not all risks facing workers’ compensation carriers
would be considered material and ERM should primarily focus on
critical risks. Additionally,
as a part of ERM it is recognized that some risks exist due to
actual outcomes that may be different from anticipated outcomes. As such for effective
ERM, risks should not be confined to
only adverse departures from expectations. Furthermore, in order for ERM to be effective, the following
attributes should be embraced by the workers’ compensation
insurance carriers utilizing ERM.
1)
Recognize
that ERM is an integral process (i.e., ongoing in nature) and not
just a one-time event.
2)
When
assessing risks, risks should be reviewed on an enterprise-wide
basis. For example some
workers’ compensation insurance carriers could break their risks
into three categories:
a.
Insurance
Risk
b.
Financial
Risk
c.
Strategic/Operational
Risk
3)
It
is critical that risks be assessed and quantified where feasible
(which includes any correlations among risks).
4)
Strategies
must be developed and implemented to avoid, minimize or possibly
exploit significant risk factors.
5)
Risk
management tools/methodologies/practices are evaluated for trade off
between risk and return in order to maximize a workers’
compensation insurance carrier’s value.
In
conclusion, for workers’ compensation insurance carriers ERM
is an integrated process oriented approach to identifying key
business risks and opportunities while evaluating the impacts of
risks in order to assist the workers’ compensation insurance
carriers in maximizing their value. When successfully and actively pursued ERM can help
workers’ compensation insurance carriers to understand, quantify
and more effectively manage the totality of its risks. Lastly, because risks are an inherit part of doing business,
ERM becomes a critical part of doing business as well. For workers’ compensation insurance carriers seeking
opportunities to become “more competitive” embracing ERM may
become a strategic asset which could allow for better business
decisions, enhance an organization’s confidence and aid in
achieving improved business outcomes.
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