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The new millennium has heralded a rapidly rising cost trend for property/casualty insurance and employee health benefits. Commercial buyers, particularly those with 50 employees or more, are actively seeking methods to help control their double-digit increases. Financial department managers and CFOs, along with a growing number of CPA advisors, are discovering that the solution to controlling rising insurance costs lies in sound, proactive risk management.

In the past, companies have depended upon their insurance advisors to purchase and, at times, administer various risk management services. The problem so many buyers and advisors face, however, is how to answer the question, "Where do we begin to initiate our own risk management analysis?"

A basic step in the risk management process is the identification and analysis of the risk and insurance programs currently in place. Once a company has an understanding of the areas requiring risk management, solutions can be formulated and insurance brokers can be brought in to work within a team framework.

But first thing's first ...

The Risk Management Audit

To conduct an effective audit, you must have the right tools. In this instance, those tools take the form of questions, which hit at the heart of the problem as deftly as a hammer hits a nail.

The following risk management audit is a "do-it-yourself" guide to identifying some key areas of concern. It is not, however, intended to be the only audit procedure adopted.

Each question requires an affirmative or negative response. All those questions answered in the negative should be earmarked as prime topics for discussion with your current or future insurance broker or consultant.

Safety & Claims Management

• Does your Safety & Claims Management program include periodic Operations/Facilities Safety Inspections (minimal monthly) by qualified internal staff, using personalized safety inspection documents/reports that are passed on to management?
  YES | NO
• Does your Safety & Claims Management program include a formal Supervisory Claims Investigation and Reporting program?
  YES | NO
• Does your Safety & Claims Management program require periodic supervisory accountability on the most common claim trends?
  YES | NO
• Does your Safety & Claims Management program include a progressive return-to-work program for injured employees or employees absent because of other causes?
  YES | NO
• Does your Safety & Claims Management program include a formal Disaster Recovery Plan (crisis management)?
  YES | NO

• Employee Dishonesty Prevention?
  YES | NO
• Employee Practices Liability Prevention?
  YES | NO
• Directors and Officers Liability Prevention?
  YES | NO

• Under your Workers' Compensation Program, is there an analysis system in place that verifies the accuracy of the experience modification for the current year, as well as projections for the next year?
  YES | NO
• Are Workers' Compensation payrolls prepared internally prior to the insurance company audit, which helps avoid unnecessary mistakes in payroll amounts or classification errors caused by the insurance company auditor?
  YES | NO
• Are the Employee Health Insurance programs audited periodically to identify the quality of coverages, accessibility of the hospital and doctor networks, and the level of wellness and preventive care commitments, work/life coverages, and flexible benefits programs?
  YES | NO
• Is the Employee Health Insurance Program analyzed for medical utilization patterns, and are costs benchmarked/compared to national and regional norms?
  YES | NO

• Are insurance companies' financial ratings analyzed using Best Key Rating Guide, Moodys, or Standard & Poors publications?
  YES | NO
• Have you evaluated and applied a Contractual Risk Transfer procedure?
  YES | NO
• Are all owned entities named as "insureds," including appropriate contractual wording that provides coverage for joint ventures and future entities created or acquired?
  YES | NO

• Are all properties (real/personal) insured at 100-percent replacement value?
  YES | NO
• Are insured properties covered for All Risk (special coverages), including earthquake and flood?
  YES | NO
• Are annual income and expense valuations conducted to ensure adequate insurance for protection of revenue and continuing expenses (Business Interruption and Extra Expense)?
  YES | NO
• Is there adequate protection for revenue loss resulting from insured damages to major suppliers or customers?
  YES | NO
• Is there a verification of adequate coverage for exposure from boiler, air conditioner, electrical system, and machinery breakdown?
  YES | NO
• Does the insurance program provide adequate protection for money/securities and employee dishonesty claims?
  YES | NO

• Has an analysis of coverage limits for all liability policies been performed, and do adequate limits appear to be in place (minimal recommended limits start at $5,000,000)?
  YES | NO
• Are coverages in place to protect the company against liability from violations in employment practices, including defamation, wrongful hiring, and termination allegations?
  YES | NO
• Are directors or officers protected against liability claims, regardless of whether the company is a public or private entity?
  YES | NO
• Are Employee Benefits Welfare Fund administration exposures covered under a Fiduciary Liability Policy?
  YES | NO
• Is the company's financial exposure from its Web site and e-commerce activities adequately insured through an Internet Liability Policy?
  YES | NO

• Is there a written Risk Management Plan for the administration of both property/casualty and employee health benefits under one common company mission?
  YES | NO

Reprinted courtesy of Insight, the magazine of the Illinois CPA Society. For subscription information, please call (312) 993-0393 or visit www.icpas.org.

Please note that there are also a number of risk management journals available to explain in depth the answers to these audit questions and to expand on other areas of both risk identification and program design. The 2000 issue of Controllers Business Advisor, published by Warren, Gorham & Lamont, has two chapters devoted to "Controlling Property and Casualty Costs Through Risk Management" and "Controlling Health Care Costs." These chapters offer indispensable advice and direction. These two chapters are authored by Thilman & Filippini.

About the author: Thomas Filippini is partner at Thilman & Filippini, which specializes in risk management services for employee benefit clients throughout the United States.

This information is compiled and provided by George S. May International Company.
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