Service Spotlight

The Value of Quantifying Industrial Risk Exposure

In this Q&A, the U.S. CEO of a global risk consultancy discusses why measuring loss expectancy is critical to understanding exposure.
By: | June 19, 2018 • 5 min read

The saying goes, “You can’t manage what you can’t measure.”

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Risk managers can relate. Attaching firm figures to loss potential and probability provides a road map to a company’s most significant exposures and serves as a starting point for prioritizing risk management strategies. However, many lack the resources to accurately enumerate their exposures.

In heavy or complex industries, a property loss can not only incur significant expenses related to repair or replacement. It can halt operations partially or completely for an extended period of time. Estimating extent and duration of those impacts and developing a plan of action to mitigate the consequences is key to avoiding substantial business interruption losses.

Torsten Leske, CEO at AXA Matrix Risk Consultants North America — which focuses on property risks for industrial companies — describes how quantification is a necessary next step after risk identification.

R&I: What are the top risks facing industrial facilities?

Torsten Leske, CEO, AXA Matrix Risk Consultants North America

Torsten Leske: Property damage and business interruption resulting from fire, machinery breakdown, or natural catastrophes are potential exposures with significant loss potential faced by many industrial companies.

The potential business interruption loss is often greater than the property loss itself, especially when there are interdependencies between sites in more complex production chains.

In industries such as the automotive or aeronautical sectors, for example, parts are manufactured at several different sites and then assembled at other locations. So if something happens at one site, it can have a tremendous impact on other sites as well.

R&I: Are companies in this sector doing enough to mitigate these risks?

TL: An important issue is lack of accessibility of information and transparency into the extent of potential losses. Many companies don’t have a reliable way to quantify their exposure, which is the first step in determining how to prioritize risk management strategies.

R&I: Why is quantifying exposures so important?

TL: Attaching values to an exposure not only helps risk managers prioritize risk improvement decisions, it also enables them to demonstrate return on investment to their financial managers or the board of directors and more effectively argue for their support. Companies need tools to measure loss expectancy and compare that to the cost of implementing effective risk mitigation strategies.

This helps clients see where their money can be invested best to ease exposure. If you have a limited budget for capital improvements, you want to get the most benefit out of every dollar and achieve savings in the long run. Quantifying loss expectancy allows you to see calculate potential savings before you invest.

R&I: What tools do you use to measure loss expectancy?

TL: One tool we utilize called IsoRisk allows us to benchmark exposure at different sites or manufacturing tools, taking into account the vulnerability of a facility or tool to a loss, and the severity of a potential loss at each site. It thus provides a visual representation of a risk cluster that allows risk managers to easily identify the most exposed assets.

These tools also provide valuable help to risk managers internally to win support within their own organization, and externally to provide information to insurance markets.

Another tool called CITRAN graphs the loss expectancies of identified exposures against the capital expenditures needed for risk mitigation. The tool simulates loss expectancy reduction by available budget, thus helping to prioritize risk improvement investments.

It can also be used to determine a needed Capex to remain below a defined loss expectancy, which can be based on a client’s risk appetite and its current or planned risk transfer solutions. This is a powerful tool aiding risk managers in their decision-making process.

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Different risk scores by site, division, or group are proposed to the client to provide benchmarking with other sites or against peers. These tools also provide valuable help to risk managers internally to win support within their own organization, and externally to provide information to insurance markets.

R&I: Who makes these recommendations, and how?

TL: An experienced loss prevention consultant will do a complete assessment of an industrial facility. A typical loss prevention survey starts with an opening conference with senior management followed by a complete facility tour both inside and outside including the roof area.

Emphasis will include reviewing process hazards, warehousing and utilities. Fire protection equipment will be physically inspected and management loss prevention protocols will be reviewed.

An exit conference with senior management will be conducted at the end of the visit to give feedback on the main exposures identified and propose recommendations on how to improve the risks. Any recommendations will be discussed and confirmed in writing in a loss prevention report after the survey.

Most of our engineers have been working in the consulting field for many years. The average experience level that we have is between fifteen and twenty years, at least.

Most of our engineers have been working in the consulting field for many years. The average experience level that we have is between fifteen and twenty years, at least. Most of our engineers have worked previously in the industry in different capacities, and have varied engineering backgrounds, including fire protection, mechanical, civil and electrical engineering.

Although we do offer desktop consulting services, what our clients find as a far greater value to them is our approach and dedication to working in the field, hand-in-hand, on-site, in-person.

R&I: How do you track the effectiveness of these recommendations over time?

TL: When working with a new client, the first year is typically focusing on risk assessment, identification and quantification of exposures, and proposing risk mitigation strategies.

We start seeing substantial improvements after working with a client for several years providing continuous support for improvement of human element programs, implementation of recommendations, and prioritization of risk mitigation measures.

Typically resurveys are conducted in annual frequencies and progress is measured through completion of recommendations and improvement of risk scores. An online recommendation follow-up system is used in close interaction with the client to keep permanently abreast of any progress made.

Risk improvement and priorities are presented at least annually during stewardship meetings with the corporate risk management organization. Long-term partnership with our clients has proven to be one of the key elements for success of continuous risk improvement. &

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

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That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

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Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]