Safety by the numbers

Using safety management will pay you more dividends as your programme matures by preventing losses and minimising the impact of losses that do occur, says George Gibson of Charles Taylor Safety Management Services

Various industry groups and insurers have recognised and applied loss control methods to stabilise their losses and add predictability. Some examples of loss control methods among insurers include loss control departments, underwriting guidelines and increasing deductibles and retentions, while among clients, they can include incident investigations, specific personal protective equipment policies, and training. All are aimed at reducing or eliminating claims to stabilise the loss cost.

In the extreme, insurers drop a specific line of insurance and/or related industry because the losses are not predictable. Even though they have loss controls in place, the customer base is not consistent with applying them. This has driven some companies in those industries to create their own captive insurance company.

Along with those companies with established controls in place and stable losses, they may choose a captive to retain the underwriting profits (or losses) for insurable risks. These actions have yielded high dividends in the form of cost reduction and exposure reduction.

Then there are some organisations that just buy coverage. They don’t think of loss control and don’t pay much attention to managing those risks. Then when they can’t get insurance or the rates have gone through the roof, it becomes an all-out war against the causes for the poor performance, which can include the insurance company’s claims department, the loss is a one-off exception to the rule, or the injured party is to blame.

In the captive insurance world we don’t have the luxury of blaming someone else for our results or lack of dividends. We have become the insurance company and the client. As Esperanza Mead, president of Actuarial Factor, puts it: “The key to insurance is to control the losses and the expenses. If you don’t mitigate losses, then paid losses, case reserves, and incurred but not reported losses (IBNR) will increase. This translates into underwriting losses and higher/unaffordable premiums.”

So how do we get the loss control dividends and what do we do when they stop?

First and foremost, you need to take a lesson from insurance carriers and brokers. They invest heavily in loss control staff and practices. These set the standard for providing a stable environment to underwrite the risk. We can’t ignore the fact that insurance companies have solid reasons for not covering certain things. What are you doing to control your exposure?

Looking at your risk and controls are essential to the long-term success of the captive. Some of the coverages are very low frequency of loss, but when losses occur you are the insurance company.

“Adopt loss control methods consistent with your exposures. Determine this by conducting a risk analysis of your exposures, which entails creating a risk register and keeping it up to date.” This drives your risk planning and loss control to help reduce both frequency and severity of loss, according to Christopher Moss, director of risk consulting for Charles Taylor.

Creating a risk register seems simple but requires good judgement and deep understanding about the risks you have or may face in the future. The components of a risk register are: description of risk; risk type; likelihood of occurrence; severity of effect; countermeasures; potential additional mitigations; risk owner; and status.

Listing the countermeasures or mitigations assumes that you will follow through and implement them. A very common method is a claims review with your adjuster. What you learn from that review should be brought forward to the loss control (countermeasures) applied. From the captive insurer point of view, the dividends should be: avoiding injury to employees, customers or the public; meeting your risk transfer/insurer requirement; your business operates better; lower costs; less down time; and higher customer satisfaction and retention.

How will I know when the dividends have stopped?

I think it really involves the stability of losses. If they are stable then you can predict with a good confidence level the funding for your captive, which would be the first indication. This also means if nothing changes you will still get those losses. Additionally, if you’re not looking at the leading indicators then expect the unexpected.

What’s next? Safety management

Safety management is all about forward thinking and looking at the leading indicators and balancing that with lagging indicators such as loss experience.

There is an excellent study by the Campbell Institute benchmarking leading indicators. Its focus is on the environmental, health and safety performance, which can be applied to insurance coverage areas.

When referring to the leading indicators, the Campbell Institute references the following areas:

Operations-based: indicators that are relevant to the functioning of an organisation’s infrastructure (for example, machinery and operations), which could be potentially site-specific.

Systems-based: indicators that relate more to the management of an EHS system, which can be rolled up from a facility level to a region/business unit or corporate level.

Behaviour-based: indicators that measure the behaviour or actions of individuals or groups in the workplace, as well as people-to-people interactions related to supervision and management. These are also useful at site-specific level through management level.

How this may apply to a specific risk? Let’s take a look at reputational risk from today’s headlines, Blue Bell ice cream. This is an established, well-respected 108-year-old brand that was distributed in 23 states, mostly in the Southern US, as well as at least 27 other countries. It offers both institutional and retail products. The company almost went out of business due to a listeria outbreak linked to its products by DNA testing. The following is a select outline of events from the Food and Drug Administration’s (FDA) website.

The FDA was notified that the three strains related to the illnesses reported in Kansas and four other rare strains of listeria monocytogenes were found in samples of Blue Bell Creameries single serving Chocolate Chip Country Cookie Sandwich and the Great Divide Bar ice cream products collected by the South Carolina Department of Health and Environmental Control during routine product sampling at a South Carolina distribution centre, on 12 February 2015. These products are manufactured at Blue Bell Creameries’s Brenham, Texas facility.

On 13 March 2015, Blue Bell Creameries reported that it had removed the affected ice cream products from the market by picking then up directly from the retailers and hospital settings it serves. The company also shut down the production line where the products were made.

The Center for Disease Control reported that as of 20 April 2015, a total of 10 patients infected with several strains of listeria monocytogenes were reported from four states: Arizona (one), Kansas (five), Oklahoma (one), and Texas (three). Illness onset dates ranged from January 2010 through January 2015. All 10 patients were hospitalized. Three deaths were reported from Kansas.

Blue Bell Creameries announced that on 27 April it would carry out an intensive cleaning and training programme at all of its production facilities. On 14 May, Blue Bell Creameries announced that it had entered into voluntary agreements with the Texas Department of State Health Services and the Oklahoma Department of Agriculture, Food, and Forestry outlining a series of steps and actions it would take as part of its efforts to bring its products back to market.

According to Blue Bell Creameries: “The actions include rigorous facility cleaning and sanitising, revised testing protocols, revised production policies and procedures designed to prevent future contamination, and upgraded employee training initiatives.”

The firm also stated that the agreements include provisions specific to addressing listeria, including: conducting root cause analyses to identify its potential or actual sources; retaining an independent microbiology expert to establish and review controls to prevent the future introduction of listeria; notifying the Texas and Oklahoma health agencies promptly of any presumptive positive test result for listeria monocytogenes found in ingredients or finished product samples, and providing the state agencies full access to all testing; ensuring that the company’s pathogen monitoring programme for listeria in the plant environment outlines how the company will respond to presumptive positive tests for listeria species; and, instituting a ‘test and hold’ programme to assure that products are safe before they are shipped or sold.

An established firm such as Blue Bell Creameries has loss control programmes in place and has successfully served its customers for 108 years. It knows the right procedures and is an expert at making ice cream. Unfortunately, its loss control programme stopped paying dividends.

Looking at the lagging indicators of claims/losses did not predict the failures in the manufacturing process. Reading regulatory inspection reports prior to its crisis didn’t tell the management they had a problem.

Some items that stood out from the FDA facility inspection reports during the course of this listeria outbreak include: paint deteriorated above food processing equipment; ingredient hoppers not kept clean; employees not wearing appropriate clothing; dripping water from pipes over production lines; and an inadequate sampling programme.

Behaviour, systems and operational indicators would have revealed the company’s issues and facilitated resolution with a proactive safety management approach.

An example is a safety management dashboard that indicates key metrics on a weekly and monthly basis.

This may include: senior management visits; incident occurrence and resolution (near loss investigations included); conversations with associates; tracking the number of outstanding maintenance issues; and vendor reviews.

Safety management cultures

With good reason, we focus on the monetary impacts of risks. Managing those losses with a focus on the claimant and individual cases makes sense, but that may put proactive management approaches in a reduced role. Let’s compare the two approaches:

Culture

• Management actions indicate a focus on prevention/elimination of hazards to customers and employees


• Accountability of management


• Resources equal for loss control


• Visibility

• No engagement of senior management


• Focus on the claimant


• Company resources assigned limited to cost reduction


• Regulatory fines drive programme focus