Corporate risk and finance managers, faced with the lingering effects of a global financial crisis, dramatically downsized staffs and reduced budgets are becoming increasingly concerned about managing those expenditures as part of their total cost of risk, according to a survey conducted by global professional services company Towers Watson.
Sixty-four percent of respondents said the cost of claims with their retention — including captives — was the most important issue when it came to controlling their total cost of risk. The survey also indicated that premiums paid to a third-party insurer (not including captives) ranked second in terms of importance, at 49%. Thirty-nine percent said that “other” provider fees, such as brokers, actuaries and third-party administrators (TPA) were at least somewhat important.
“The impact of several external forces, most notably cost pressures, are dictating how companies do business, and this has manifested itself into a new set of required competencies,” said Steve Levene, leader of Towers Watson’s insurance brokerage business. “Decisions about how to meet the claim department’s most critical objectives must begin by assessing how well prepared the organization is to accomplish its most vital claim functions.”
Levene asserted that best practice companies are shifting from improving customer satisfaction to managing customer value, and moving from “an internally based focus on operations to a goal-oriented approach that focuses on a balanced array of measures, from data mining to integrated inference models, expert systems and evaluation tools.”
The survey of 244 risk managers also found that 55% of risk and finance managers said their company has a true enterprise risk management (ERM) process in place. Prior surveys indicate this percentage was as low as 11% in 2000 and 37% in 2005. Of the companies having established ERM capabilities, 71% said they have identified and prioritized key risk and have assigned risk owners.
Of the 45% of companies that currently do not utilize ERM, 37% said that there has been no articulation of the value of implementing ERM, while 27% noted that ERM was too resource-intense and expensive to pursue, regardless of cost.
“ERM can be a hard sell in the current economic climate; in many cases, it is a discretionary undertaking, and there is a perception that it is expensive to implement,” said Barry Franklin a director in Towers Watson's corporate risk management practice. “Even among companies that have implemented ERM, many don’t address hard-to-quantify risks because they simply lack the metrics to understand their potential impact. ERM is ultimately about better management of all capital — physical, financial and human.”
The survey also revealed that while for some companies managing individual claims is seen as a subjective and experience-based discipline, there is interest in augmenting those capabilities with emerging tools based on predictive models. Twenty-six percent said they would like their TPA to have access to predictive models as part of the service bundle, while another 20% indicated they would like their broker to have access to predictive models to better manage the TPA.
“Companies are shifting from monitoring aggregate claims statistics to leveraging knowledge in order to optimize individual claim outcomes,” said Franklin. “The conventional approach of measuring aggregate performance against accepted benchmarks often perpetuates mediocrity, whereas a knowledge-based strategy can improve claim outcomes and operating efficiency by better focusing company resources.”
Among other highlights of the survey:
- Despite widespread concerns over the acceptance of contingent commission fees by brokers from insurers, 39% said they approve of contingent commission fees as long as the their broker discloses all compensation in a timely fashion; 11% indicated that they have no problem with the fees, as long as current laws are followed and detailed records are kept for regulatory review.
- More than half of respondents (52%) said the key attributes they seek in a broker are placement capability and market leverage.
About the survey
Two hundred and forty-four risk and finance managers took part in the Web-based survey, which was conducted in April and May 2010. The participating companies are from a variety of industries, with 69% of them having revenues of at least $1 billion.
About Towers Watson
Towers Watson is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers solutions in the areas of employee benefits, talent management, rewards, and risk and capital management. Towers Watson has 14,000 associates around the world and is located on the web at www.towerswatson.com.