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Risk management and small business.


When New owners bought Heartland Moving and Storage Co. . last August, one of their first actions was to ask their insurance agent to put together a risk program. "At that time, there were no safety measures to prevent accidents," says Bob Jackson the general manager. Because of a past history of accidents, a modifier was attached to the Bellevue, Nebraska, firm's workers' compensation insurance policy that raised the costs of that insurance.

The company's agent, Insurance Agents Inc. of Council Bluffs, Iowa, designed a risk management program to educate drivers and warehouse personnel on the dangers inherent to the moving and storage business. They also set up safety policies and guidelines, and inspected vehicles and the warehouse to make sure they met federal regulations. "Since then, knock on wood, we've had no accidents at all," says Mr. Jackson. "That means that we don't have to pay higher premiums for our workers' compensation coverage. No losses means more profits. It's as simple as that."

Twenty years ago, Heartland's only concern might have been whether or not its trucks were fueled up. Risk management programs were something only Fortune 500 corporations cared about. But not today: More and more small and mediumsized firms are finding that risk management programs are essential if they are to survive and prosper in a more competitive economy. And the liabilities for both large and small companies have grown, with risks today having an even greater impact on the bottom line. No doubt, the need to manage these risks has also penetrated mid-size and small businesses.

According to the U.S. Small Business Administration, 71 percent of companies in the United States are small or mid-size, and industries dominated by small businesses will account for most of the nation's economic growth over the next few years.

Small and mid-size firms are an integral part of the U.S. economy, yet many executives at these firms believe that the business environment for these companies will only become riskier and more complex in the future.

A recent survey by the College for Financial Planning in Denver has revealed that one in three new clients for financial planners is a small business owner. This has created a new aspect in providing services to this growing market. Interestingly enough, 64 percent of financial planners counsel their clients to adopt risk management strategies, a statistic that ranks just slightly behind recommendations to adopt profit-sharing plans, buy-self agreements, cash management strategies and simplified employee pension plans.


THE WEB OF RISKS that can snare a small or mid-size company has multiplied tenfold in recent years. According to Thomas Wander of Tillinghast, a Towers Perrin company, today many small and mid-size companies have pollution risks as complicated as those of large companies, and the number of small businesses purchasing pollution coverage has increased in recent years. In addition, smaller companies share many of the same workers' compensation problems as those plaguing large firms.

Furthermore, smaller firms are penetrating the global marketplace. "In today's world, there are many midsize companies operating on a worldwide basis," says Richard Chappell, who heads Alexander & Alexanders Corporate Specialty Office on the West Coast. These firms can be facing entirely new regulatory environments in those foreign countries. They have exposures with employees working abroad, including political and medical risks.

There are also technology exposures such as computer risks, since most small and mid-size firms are just as computer dependent as large companies. "You can have all the fire insurance in the world," says Phillip Barry, of Compro Insurance Services in San Jose, California, which provides global risk management services for hi-tech companies in the Silicon Valley. "You can have all the liability insurance you need, but if you don't have insurance for that piece of software that can shut down your production line, you could be out of business."


SMALL AND MID-SIZE companies have also been buried under an avalanche of federal and state regula[ions [ha[ can make doing business a costly nightmare. According to the National Federation of Independent Businesses (NFIB), which asked small companies to list their problems in order of priority, regulatory burdens ranked eighth in 1992, whereas in 1986 they ranked nineteenth. Regulatory problems increased in severity more than any other type of problem over the last five years. The change was particularly notable in states such as California, indicating that the federal government was not solely culpable for the increased problem in severity.

Indeed, the Civil Rights Act, the Americans with Disabilities Act (ADA), environmental regulations and other laws that have been passed in recent years have all led to increased litigation against companies both large and small. The NFIB is fearful that these new regulations will have a chilling effect on the abilities of the small business owner who must operate in an increasingly hostile environment.

"One of the acts that is becoming increasingly burdensome is the Occupational Safety and Health Act (OSHA)," says the NFIB's Tracy Wurzel. "The newest proposed regulation that applies to companies of 10 or more employees is mandatory seat belt and helmet usage. An employer will be responsible for requiring and making sure his or her employees are wearing seat belts at all times when on company business in a company vehicle. If the employee uses a motorcycle, the employer will be held responsible for that person's wearing a helmet. If employers don't provide driver education training for employees, they could be subject to a fine."

Effective July 1992, companies with 25 or more employees must begin compliance with the ADA, which requires firms to make their offices and plants accessible to the disabled. In 1994, the ADA will apply even to firms with as few as 15 or more employees. That translates into significant costs in terms of cutting curbs, adding ramps and improving bathroom facilities. Hiring policies, job descriptions and standards will also have to be rewritten, changing the way interviews and job testing are done for small businesses. Firms will also be required to keep more accurate records in their efforts to accommodate the disabled.

Perhaps the biggest headache today for all companies, large or small, is the tremendous increase in workers' compensation costs. "It is the number one issue," says Stephen Sachs of the Hobbs Group, the brokerage operation of Arkwright Insurance. When the Insurance Research Council (IRC) asked small business owners about the factors that increased their workers' compensation costs, 66 percent said higher medical bills, 60 percent noted attorney involvement and 58 percent cited larger settlements than previously. However, the council found that there was little variation in terms of region, number of employees and annual premium.

According to a Tillinghast survey of 576 organizations on the workers' compensation crisis, job-related injuries in 1990 cost American employers over $60 billion in direct workers' compensation expenses. Yet, like the larger employers, the IRC survey points out, small businesses have in recent years taken steps to reduce on-the-job injuries: 53 percent said they have purchased safer equipment, 51 percent took inventory of workplace hazards and 35 percent held safety training.

"In workers' compensation, the small and mid-size firms are caught more so than large firms who might have the ability to self-insure," says Mr. Wander. "In many cases, small companies are stuck in the commercial insurance marketplace. As a result, they're caught in the more expensive insurance system, where they are paying insurers' profits, premium taxes and, in many states, residual market loads. It makes them less competitive in the long run?'

Small firms are facing claims that no one could have foreseen a few years ago. "We're seeing carpal tunnel claims now," says Gary Hurley of Insurance Agents, Heartland's agent. "Repetitive motion jobs, such as typing on a computer all day, can inflame a nerve in the wrist. We have to loss control that claiml so risk management programs are necessary."


INSTALLING A risk management program gives small and mid-size firms the opportunity to use the same cost control mechanisms that large companies use to save money and be more competitive. It will also give management a clear picture of the company's exposures. A risk management program will ensure that a company's insurance policies are providing sufficient coverage and are priced correctly, and it can cut the high costs of claims.

It appears many small and midsize firms have gotten the message. The IRC survey found that 84 percent of small businesses had bought property, liability and workers1 compensation coverage, up from 76 percent in 1988. One company that established a risk management program was Distribution Inc., a commercial warehouse and trucking firm in Lincoln, Nebraska. The new owners, Lucy and Robert Winter, who bought the company in ]_988, found that it had a conditional rating from the U.S. Department of Transportation (DOT). "A negative DOT inspection can close your doors tomorrow," she says. "Our agent, Len Ford, and Vince Toritte of his safety division, worked with us in meeting all the criteria necessary for a positive inspection and apprised us of requirements we were not aware of."

Besides improving its DOT rating, Distribution Inc.'s risk management program identified discrepancies in the company's workers' compensation coverage. It was paying too much for its coverage because of two incorrect classifications. "And it's financially rewarding, too, when you're in compliance with all of the DOT and OSHA regulations, because you're not subject to penalties," Ms. Winter says.

For Chips and Technologies Inc., a supplier of integrated silicon, software and design services to the computer industry, having a risk analysis done led to an increased awareness among senior management of the risks the company faced. Chips' primary exposure is property rights risks on the chip designs. "If a competitor gets our design and copies it, we can lose that market," says Lesley Mattos, the assistant treasurer who handles risk management for the firm.

Making sure there are adequate backup systems for the computers and secondary manufacturing sources for the chips are also concerns. "The assessment really raised the consciousness level of managers regarding these risks," she says. "Even,one was aware of them, but we had never sat down in a room and talked about them." Chips is in the process of establishing a risk management program based on the recommendations from the analysis.


COMPETITION AMONG agents, brokers and consultants to provide risk management services to small and mid-size companies has heated up in the last few years. Local agents and brokers are slugging it out with regional and national brokers, providing risk diagnostics and plans in an effort to attract and keep clients.

For the independent agent, the reason is simple, says Mr. Harry. "In 1983, there were 70,000 independent agents. Today, there are only 40,000. It is projected that by the year 2000, there will be only 15,000 to 20,000. Those providing more sophistication will survive."

The IRC survey revealed that businesses returned to traditional sources in recent years because the availabilty problem of insurance coverage has eased since the 1980s. About 87 percent of businesses said they relied on their agent or broker for information, but only 20 percent said they directly contacted their agent or broker.

National brokers, as well as large regional brokers and consultants, are probably too expensive for most small companies but might be just right for mid-size companies with complex risks. "We believe we can be of value to the small or mid-size customer in a difficult business or a business that has seen a lot of change, either internally or externally," says Mr. Chappell.

"Where a good broker or risk management consultant can help is allowing small and mid-size companies to put risk management into a process," says Mr. Sachs. "There needs to be a process for making decisions. And if we can help them put that process into their management context, then a lot of things are possible."

Having a risk management program might also allow small and midsized firms to take advantage of the alternative market for insurance coverage. The alternative market includes self-insurance, captives, risk retention groups and large capacity facilities. According to Robert Brian of Conning & Company, an investment firm specializing in the insurance industry, this market continues to grow. These facilities are currently writing about $50 billion a year and represent 31 percent of the total commercial lines market. "You have more small and medium-sized companies banding together, forming these facilities where there are many of the same types of risks, to get the benefits of size that they can't as individuals," he says.

While self-insurance might not be an option for small companies, group captives and risk rentention groups are, says Mr. Brian. Risk retention groups constitute only a very small percent of commercial markets but are still growing. They have become very popular with physicians, surgeons, hospitals, clinics, car rental firms, contractors, lawyers, airports, trucking companies, municipalities, ski areas and school districts. But to join a captive or a risk retention group, it is often required that companies have risk management programs already in place.


WHILE SMALL BUSINESSES continue to be concerned about the high costs of insurance and risk management programs, those concerns may be overtaken by the other costs of running a business, namely, taxes and employee benefits.

"Who knows what's going to appear on the horizon next," says Mr. Wander. "Three years ago, people weren't all that interested in workers compensation and now all of a sudden it's the hottest thing around."

"It's just very difficult to do business in this country," adds Mr. Sachs. "You can't be an ostrich. If you're going to retain risk, at least know what you're retaining. If you don't, it's a good way to be out of business pretty quick."


MOST EMPLOYEES OF small businesses tend to wear many hats, and the risk manager is no exception. A case in point is Lesley Mattos, the assistant treasurer and risk manager for Chips and Technologies Inc., a supplier of integrated silicon. software and design services to the worldwide microcomputer industry with sales of over $200 million last year.

Since Ms. Mattos began at Chips as the company's risk manager three years ago, she says the risk management function has changed rapidly. Initially, when the Firm was rounded in the early 1980s, the president was putting together the insurance packages. Then the firm hired a chief financial officer and subsequently Ms. Mattos who. in addition to risk management, handles the responsibility for cash management, credit collections. investing, debt management, and establishing and mainmining banks and ]ease lines.

All of this means that she spends a lot of time meeting with bankers, lease companies. insurance brokers and the company's sales and marketing areas. "It's a relationship type of job," she says "You report the facts to people and the rest of it is how well you can work with those people."

Having the risk management responsibility allows her to keep her finger on the pulse of the company. The underwriters want to know how much you're going to sell, so that gets you into product information. They want to know the major suppliers and major customers and the number of employees. You learn about projections and the business outlook. You get the inside scoop from the top level and other priority information."

Failing to identify a risk could be disastrous for Chips now that it. like so many small and mid-size companies, has business operations overseas. The company's most recent overseas project is a joint venture with the Commonwealth of Independent States, which involves sending PC components to Minsk and-assembling computers there. *'This is virgin territory," says Ms. Mattos. "And it's a real challenge for me."

One of the biggest exposures the joint venture faced was theft at the Minsk airport. Ms. Mattos. along with Janice Kellog, her broker from Compro Insurance Services, and the managing director of the joint venture, was able to find an unusual risk management solution. "We gave the airport a small piece of the pie as an incentive for maintaining security," explains Ms. Mattos.

Ms. Mattos, who majored in accounting and has worked for 18 years in the hitech industry, spends about 15 percent of her time on risk management duties. She says that the biggest challenge for her is educating employees from a risk standpoint. "I have to keep the lines of communication open so people can come to me and say what is happening."

One of her most time-consuming risk management tasks each year is placing the directors' and officers' liability. "The capacity fluctuates from year to year and the underwriters are very conservative, so you're caught between underwriters who are strict and directors and officers who want coverage ."

For the part-time risk manager at a small or midsize company who has to juggle so many responsibilities, the relationship with the broker becomes extremely important. "With all those changes that have occurred in the last few years, we've maintained continuity with our broker," Ms. Mattos says. "You have to feel that your broker is going to take the information on your company and really pay some attention to it so the programs that should be in place are in place."

Compro has been fulfilling many of Chips' risk management needs. They recently completed a risk analysis of the company and are working to evaluate the recommendations to set up a formal risk management program for Chips. -T.M.
COPYRIGHT 1992 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:includes related article on Chips and Technologies Inc.
Author:McDonough, Thomas
Publication:Risk Management
Date:May 1, 1992
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