For a new age of risk management,
Thilman Filippini defines Managed Risk

The offices of Thilman Filippini overlook a scenic riverfront in downtown Chicago. It's a well-chosen location in the transportation hub of the country; from here, TF consultants serve a nationwide base of clients.

But this appealing venue is appropriate for another reason:

TF's offices are not far from the spot where 135 years ago, The Great Fire jumped the Chicago River and proceeded to level the city. And out of that catastrophe emerged the early principles of what we know today as business risk management – a field in which TF has become one of the country's foremost exponents.

There is no bronze plaque or "risk management museum" to visit, but historians and economists say what happened here in 1871 was a critical turning point in the story of American capitalism.

That two-day inferno did more than destroy the city and kill hundreds. It also brought down 65 under-capitalized, speculatively-managed insurance firms all across the country. Of the 14 insurance companies in Chicago, 13 were bankrupted by claims. In its own time, this was a financial melt-down exponentially worse than Katrina.

But the strong (and the lucky) survived … and changed.

Chicago emerges as "risk capital" … TF as a leader

As the city rebuilt, Chicago became a national center for new "underwriting associations." Building codes and industry standards were transformed. Property and casualty policies began to resemble what we see today. Reinsurance companies emerged to disperse and hedge exposures, thus enabling greater and greater capacity. These and other developments in the financial markets opened the way for an era of expansion and entrepreneurial venture-taking and on a scale never before seen.

For most of the 20th century, however, the concept of risk management was more or less synonymous with insurance – what we now call "risk transfer." The term risk management itself did not come into widespread use until after World War II. As business models evolved, it was clear a broader approach was needed.

This was the setting, a generation ago, for a new kind of brokerage and risk consulting firm: e.g., Thilman Filippini.

Today's key equation: Total Cost of Risk

Times have changed … again.

Multi-state companies, business models and operational strategies now are so complex and vulnerable to various market, macroeconomic, statutory, environmental and even political issues, insurance alone cannot hope to address the inherent risks of day-to-day enterprise.

In fact, property casualty premiums account for only 20% of a typical firm's total cost of risk. This means that even lowering your rates through aggressive shop-and-bid marketing, still a widespread practice, can only temporarily and minimally impact the total bottom line.

The math is inarguable: even if you save as much as 10% by switching carriers or providers every two years, a strategy in which surveys show some employers are persisting, this cost-reduction comes from the smallest part of the equation.

One TF consultant uses a grocery store metaphor:

"It's always important to get competitive rates and the best coverages, but if you focus too much on the insurance component," said Michael Pokora, Managing Director, "it's like saving on milk … but continuing to spend more at the meat counter."

So where is that other 80%? The list is long. Four-fifths of your total cost of risk comprises indirect expenses and losses: internal administration and overhead, retained losses, outsourced activities, claims inefficiencies (a major contributor), lost time, litigation expenses, fees … not to mention tangible opportunity costs.

By opportunity costs we mean this: dollars lost to unmanaged risk are lost to operations and reinvestment.

Added to this intricate TCOR calculus are spiraling costs of employee benefits and workers compensation (obviously not factors for companies in 1871). It's easy to see why many prestigious business schools have recently begun adding "business risk management" to their curricula.

As visiting lecturers, TF staff members teach such programs. They focus on a comprehensive, organization-wide approach called TF Managed Risk.

Here are a couple of lessons from our experience with clients of all sizes in some of America's most risk-sensitive industries.

Employee Health Benefit Plans:

By far, the greatest single cost driver in most health plans isn't the premiums but poor employee understanding and use of the plan itself.

Excessive utilization of services and, in many cases, under-utilization of available cost-reducing programs can be remedied with a set of proven tools and tactics. These start with better employee communications and continue day-to-day with aggressive claims management.

It's important to note that "aggressive" claims management does not mean "abrasive." Employees can be your most effective cost-control advocates when given the right tools and right reasons. The success of new consumer-driven health plans is just one proof of this.

For much more on TF's employee benefit-plan design and claims management, please see our Services section.

Workers Compensation:

Although widely acknowledged to be the fastest growing employee- related expense for most companies, workers comp actually can be one of your most controllable costs to reduce.

To take only one of several examples, a marquee company with multiple locations slashed its loss rate 15%, 27% and 25% in successive years by implementing a corporation-wide workers comp and injury management program (WCIMP).

These steps, of course, aren't easy. TF's proprietary WCIMP Manual runs to more than 50 pages with a dozen additional tabs. And it's a program that requires uncommon management commitment.

One of the critical and often least managed aspects of workers compensation costs is establishing a close relationship with a proprietary physicians' group – preferably occupational medicine specialists – at every locality. A major medical journal study last year showed lost days and claim costs could be cut in half when workers are seen by a network doctors' group using documented, agreed upon protocols.

But again, this is easier said than done. For a detailed analysis on workers comp costs and how to control them, please see our White Paper in the Knowledge section of this site.

"Inoculating" your company

Centrally located and nationally focused, Thilman Filippini's roster of clients is a cross-section of risk-sensitive sectors: transportation, energy, construction, seniors housing and sports, among others.

"Our clients know risk management involves a lot more than P & C," said Tom Thilman. "It's a complete package … and a partnership."

"To a tremendous extent," he said, "Managed Risk is the way to inoculate your company against fluctuations in the insurance markets. When you've gained control over your total cost of risk, you're not so vulnerable to external factors."