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
6-2
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
6-4
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
6-8
Recommendations
• Written Recommendations
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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
6-9
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
6 - 11
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
6 - 14
Cooperation Between Risk Control &
Other Functions
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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
6 - 16
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 number
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Reasons (cont.)
• Determining correct premium
• Regulatory requirements – mostly workers’
compensation
• Collect ratemaking data
• Inhibiting fraud
• Reinforce confidence of insureds
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Process
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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
• Goodwill
• To insurer
• Efficiency
• Financial position
• Collections
• Customer retention
• Insurance rates
6 - 21
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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