Top Insurance & Risk Issues as Start-Ups Hit Maturity

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Over the past two decades, the growth of Entrepreneurship has blossomed and independent spirit of thinkers, innovators, and movers and shakers has redefined the American business landscape.  There have always been small businesses – usually family-owned and operated – but these businesses remained small.  Today’s start-ups have a zeal for “going big,” and many of them do.  Countless companies have started as a small idea and, due to many factors (i.e. technology, media, economics), have experienced explosive growth.  The difficultly for these companies is generally a lack of expertise outside of the core competencies on which they laid the framework for their company.  Sure, these entrepreneurs understand they need a CEO, they need a CFO, they need sales, marketing and other heavily spotlighted business functions; however, rarely do these organizations understand the need for risk managers or Chief Risk Officer (CRO).  I have personally worked with billion dollar companies (some you may have used) that have no formal risk management department.  The results, needless to say, are often tumultuous.


Listen, I get it, there are opportunity costs associated with all decisions, especially at the onset of a start-up.  But once a certain threshold has been crossed, protecting your investment and hard work should be paramount.  The basic needs of small organizations can be met relatively easily with standard package policies and legal due diligence, though when these companies mature to an established state, the expertise and sophistication necessary to ensure risks are being properly mitigated.  I have put together a short list of considerations each of these organizations should be tackling once they have reached the point of “too much to lose” or when your total cost of risk becomes financially intolerable.


Company has grown too big for a traditional guaranteed cost program

Companies should assess the feasibility and conduct a cost-benefit analysis to determine which risk financing technique is most suitable for their P&C program.  There are a variety of loss-sensitive alternatives to consider.  Assuming payrolls have increased so have insurance premiums for workers’ compensation insurance (typically a large driver of insurance costs).  However, loss-sensitive programs with retrospective ratings, deductibles, or full-on self-insurance, are available for many lines of insurance including property, general liability, Directors & Officers, and so forth.  Insurance premiums require a large up-front payment, generally quarterly, during the policy year to the insurer.  Given the long-tail of workers’ compensation claims especially, employers who move to a loss-sensitive program are able to postpone claims related payments and only required to burden the cost once medical treatment, lost time, or settlement has been incurred.  There are additional savings on premium taxes, surcharges and other fees when moving away from a guaranteed cost program.  Consideration needs to be given to collateral required by the insurer for the loss-sensitive program. Switching insurers can create additional headaches with collateral.  Ultimately, management needs to assess their own risk appetite before exploring any of these options.

Grown too big for your policy?


Unknown or unmonitored contracts and indemnification language

Specific industries have specific products and services they supply which obviously means there are a mixture of vendors that each company will enter into a business relationship with services or supplies.  Regardless of the vendor, it is necessary to review contracts with suppliers and vendors as well as any PEOs which are agencies that are supplying temporary or leased employees.  Each contract should clearly outline indemnification clauses and hold-harmless agreements that each party has agreed to accept.  Working with your legal department on contracts and alternative dispute resolution techniques such as binding arbitration for specific matters can help alleviate additional issues down the road.  For certain vendors where they have agreed to add your company as an additional insured on certain policies should be carefully reviewed and controls should be in place to maintain up-to-date certificates of insurance.



Inadequate or missing Safety & Return-To-Work Program

Depending upon your business model and product/service being delivered, disability claims could have a detrimental impact to your bottom line.  A business does not need to be classified as ‘industrial’ or have ‘heavy’ work requirements to have the potential to cause occupational injuries or diseases.  Not only are there direct costs associated with these claims, but indirect costs are often influential on profitability.  Couple these losses with key personnel and the impact is multiplied even further.  Organizations need to ensure proper controls and policies have been implemented.  Several key actions around safety include instituting documented training and onboarding for employees, conducting annual risk control assessments, establishing safety committees, engaging in preventive measures such as ergonomic and bio-mechanic evaluations, and where needed, creating a process to develop and implement remediation plans and monitoring protocols.  For return-to-work programs, the company should review what opportunities exist and then clearly define transitional work duties and accommodations.  These should incorporate policies around job availability, duration, pay scales and any consequences for refusal.  Finally, creating and maintaining a job bank for both full-duty and modified-duty positions is beneficial as it will ease the process of working with employee and their physician.



Improper or non-existent chargeback/premium allocations programs

Many new organizations fail to get departments, divisions, center to ‘buy-in’ to risk management through either preventive or post-loss reduction measures.  Having the attitude that it’s a corporate or home-office problem does nothing to hold other parts of the company accountable for their focus on insurance and losses.  Premium allocation or chargeback programs can get quite sophisticated but don’t need to as long as there is a mechanism to tie results back to individual divisions either through exposures, loss experience or a combination of both.  The particular methodology should be based a number of factors especially depending on how much control is granted to these divisions.  There ae many key benefits to such a program which can include better control over charges, improved loss prevention and reduction behaviors, incentives/penalties for divisions and to help focus on pockets of the organization that have heavy influence on total cost of risk.


Failure to monitor claims handled by carrier(s)

What started as a few claims became a few dozen, and then maybe a few hundred depending on your growth and gravity of perilous activities the company is engaged in day-to-day.  Companies, usually with limited prior knowledge or exposure to insurers (outside of their own home & auto policies) are under the belief that they are not only filling their compulsory duties, but partnership with a vendor who will provided them with a promise to pay and do with high quality.  This is true, though with any service provider, there are competing interests and with insurers, claims adjusters with caseloads that do not allow for the type of quality you deserve.   Companies need to ensure they are active participants and work together with their carriers to resolve claims.  Whether it is ensuring appropriate litigation is moving forward on a premise liability claim or working to bring an injured employee back to work, organizations needs to stay involved and persistently follow-up with their assigned adjusters to safeguard that no claims are headed in the wrong direction.  Just a few claims can significantly impact premiums at next year’ renewal.   Depending on size and premium, organizations may be able to get higher quality, most experienced adjusting staff assigned to their claims, or perhaps, be placed with a designated team.  Protocols need to be in place to assess not only individual claims, but holistically the carrier’s overall performance as well.  Consideration should be given to ensure claims are properly being handled in accordance with best practices (i.e. litigation management, investigation, compensability decisions, medical management, and others), appropriate reserve are posted to the file, and whether there has been any leakage which Is increasing your claim costs.


Not maximizing your broker

Once your company begins to thrive, a surge in insurance premiums will not be far behind.  As your company’s value increases so does the value your broker places on your business (at least it should, if not, reconsider your broker).  Brokers often a full suite of services outside of merely marketing and insurance placement.  Firms should be cognizant of these services and begin to tap into the resources and expertise brokers’ offer in regards to loss control, claims advocacy, analytics, M&A due diligence and other risk consulting services to help your understand and manage risks as your business grows.   Brokers (should) know your business, trucking, manufacturing, technology services, and so on.  They have great insights into market trends that can affect both the risks and regulatory environment under which the company operates.  Finally, brokers are a great intermediate for introduction to other vendors who specialize in insurance cost containment, legal matters, and can other services to mitigate risk.


Poor internal controls and processes for reporting claims and new exposures

As operations grow and become fragmented, complexities begin to form that were never an issue under the small silo of a start-up.  This challenges of developing channels to ensure information flows to all need-to-know parties is not just an insurance issue; however, insurance mishaps can have major financial consequences.   Acquisitions of new property or equipment that is not reported to the insurer timely could affect coverage if a loss occurs.  Knowing the full value of exposures is essential to certify that the proper insurance limits for each policy is adequate enough to respond to potential losses.  For claims, late reporting can lead to claim denials, regulatory fines and penalties, and strain the relationship with insurer.  Defining and implementing procedures to facilitate reporting and oversight of claims is a critical responsibility.  Companies should look to designate specific responsibilities to either corporate and/or field staff related to all of these functions.



Do not overlook or underestimate the risks, and the need to manage those risks, woven throughout your operations.  Often, executives think about the one catastrophic event that needs to prevented, or mitigated should that event actually ensue.  This is generally not the loss that sinks the ship.  Those in the industry know that severity is only half the equation, the other being frequency.  It is the culmination of many smaller losses, that if go unchecked, eat away at the financial footings the company thought they enjoyed.   Furthermore, the possibility that one of those monstrous occurrences ultimately materialize is magnified.  Growth can only be obtained as much as losses can be minimized; otherwise, you are playing a zero-sum game.

About Brian Reardon MBA,ARM,AIS

Brian Reardon, AVP of Worker's Compensation Claims at Maiden Holdings in Bermuda and NYC. He has over 14 years of P&C experience working on all sides of the industry including carrier, reinsurer, TPA, broker and employer. He holds multiple industry designations and a MBA in Insurance and Risk Management from St. John's University. He's a Board Member at AmComp (American Society of Workers Comp Professionals) and a Fellow at the Claims & Litigation Management Alliance.

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