Through my experience as Sr. Vice President of Risk Management for a 20,000 employee PEO, a consultant to numerous PEOs of various sizes, and an agent to my own PEO clients, I’ve had the opportunity to see a lot of diverse business operations in my industry. I’ve noticed a link or continuum in the approach that PEO’s have to their business operations. The approach many of these businesses take toward the Risk Management of their clients (everything from selection, underwriting and policy administration to loss control, claims management, and metrics analysis) has been an indicator for long-term growth and sustainability. I call this moving from good to great through risk management, and I’ll outline these maturity stages with the observations I’ve made over my years in the industry.
Uncertainty – This is the first stage for any PEO (or most businesses for that matter). It’s categorized by confusion toward the structure of a Risk Management program, no commitment to build a structured risk platform, and uncertainty about the Workers Compensation (WC) performance. Companies in this stage are usually heavily reliant on the insurance company for administrative tasks and typically do no statistical reporting or analysis. They will usually have a Guaranteed Cost WC policy (with any available carrier), and are very reactive to crises.
Awakening – Realization that something has to change (but won’t quite commit). This is usually brought on by the desire for growth and market share, a significant claim (or near miss), or cancellation/non-renewal of the WC policy by the carrier. I wrote more about fixing the WC experience mod for a PEO recently, because an elevated mod has also been known to trigger an awakening. During this stage a company may find itself inquiring with peers for information sharing, and they may even implement some basic processes to see if they really work. The PEO will not be willing to make anything formal, and still unwilling to pursue risk retention (or deductibles) for the WC insurance program. They will, however, begin to measure some basic performance criteria.
Enlightenment – Recognition that the creation of a formal processes will result in a positive change. The PEO will organize and make a deliberate effort to create some fundamental practices and implement them inside the PEO with clients. Often times, programs like COI tracking, measurement of book loss ratio, field loss control, and return to work (RTW) are started during this stage of PEO development. This stage may even have the first efforts to quantify the Total Cost of Risk (TCOR), and the PEO may enter into a low level risk sharing (low retro or small deductible) WC policy.
Wisdom – Risk Management issues are systematically identified and dealt with in this stage. The TCOR has been fully identified and understood. The PEO understands how Risk Management is used to:
- Improve client performance
- Attract new clients
- Attract additional insurance carrier interest
- Create a profit center
Also during this stage of development, the PEO clients have come to value safety and loss control advice and they work with the PEO to manage and mitigate claims. The PEO has improved data analysis and can generate and use client level performance reports to identify poor performers for additional assistance. The risk retention has increased in this stage to include a significant deductible or higher risk retrospective rating plan. The PEO will see a significant financial benefit from maintaining good performance.
Certainty – Risk Management is considered an essential part of company management. Very few significant problems arise and reporting metrics are comprehensive and drive improved service and performance. The TCOR is at its lowest point and contributes to company revenue, growth and profit. A PEO in this final stage will have partnered with an insurance carrier to develop a robust data management system which includes predictive modeling. Claims are closely monitored at both the client and carrier level on a monthly basis. Finally, there is enough confidence in future performance that a substantial portion of risk is retained through a Large Deductible ($1M+) or Self Insured WC program. Risk Management is viewed as a profit center.
Hopefully, understanding where your company lies within these stages of development can give some guidance for profitable growth.