David Brauer considers the content and value of risk management stewardship reports.
Most employees in the United States meet annually with their managers to review what they have accomplished during the past year and establish goals for the current year. Many reviews also look at an employee's long-term objectives. By conducting an annual review, employees and their managers can discuss what has happened in the past year and plan for the future based on the organization's current business plan.Risk management stewardship reports, completed by the insurer and reviewed with the risk manager, broker, and consultant perform the same function as an annual review. The insurer outlines the prior year's objectives, identifies what goals have been achieved, reviews measurable results, and sets a plan for the new year. In these situations, the insurer's “manager” is also its customer, the risk management team.
Importance of stewardship reports
A corporation's unique needs and objectives, as well as those of the risk management department, should direct an insurer's activities. All parties should be working together to manage the risk exposures. Stewardship reports can identify how risk management contributes to the corporate objectives and be used to make improvements to the risk management program. Stewardship reports should have two components:
• Create an executive summary for financial management based on the previous year's performance.
• Establish an action plan for the upcoming period outlining how the insurer plans to assist in accomplishing the corporate and risk management goals.Information in the report should be directly tied to a company's operations and objectives. For example, if a company manufactures paper, then the report should relate the risk management savings to how many tons of paper would have to be sold to pay for equivalent losses. Financial managers, including cfos, are interested in financial measures that relate directly to their business.
Insurers should present risk managers with an executive summary for the year, which should consist of performance highlights and interesting visuals. The remainder of the report should contain background information on the program's objectives, achievements, measurements, and future strategies. Insurers need to carefully consider the information being included.
Too much information becomes overwhelming, and none of the report will be read. If not enough useful information is included, then the report will not add any value. The insurer needs to work closely with the risk management team to determine what is required for each report and listen carefully to suggested changes in the report's format. According to Mike McGinnis, director of Risk Management for Baptist Memorial Healthcare in Memphis: “Usually after a stewardship report has been presented I am asked what I thought of it and if I would make any changes. My experience has been that, even after I give my opinion, the next reports do not change.”
Creating an executive summary that captures a cfo's attention
Executive summaries are the most important part of stewardship reports. The purpose of this one-page summary is to provide cfos with interesting and useful information on the risk management program (see Exhibit 1). Formats should be easy to understand - risk managers should be able to immediately share this summary with the cfo and other senior managers.
Creating a one-page summary that will capture a cfo's attention is not an easy task. Risk managers and their insurers need to understand the major issues that are important to cfos and highlight only this information. Simple charts and graphs should provide the majority of the information.
In the executive summary, the risk management objectives should be clearly and simply tied to the corporate objectives. An overview of the program's accomplishments as well as the effect on corporate profits should be clearly stated. Obviously, in some situations a cfo will want more details on a particular accomplishment or line of coverage. This information should be readily available within the body of the report.
Seven sections of stewardship reports
The remainder of the stewardship report outlines the prior year's accomplishments and plans for the coming year. Insurers should focus on reporting results and plans in terms that are meaningful to the risk manager's corporation. Comprehensive stewardship reports should contain the following seven sections:Section 1: Overall program results/benchmarking information
The first section of the report expands the executive summary and should provide information on the program's results. What was the total cost of risk? How many claims occurred for each line of coverage? What types of accidents and injuries did the company experience? How did safety programs eliminate losses? How did managed care programs reduce claim costs?
Insurers need to work with the risk management team to decide exactly what information should be included in this section. Insurers can supply risk managers with an extensive amount of information. Again, the challenge is highlighting results that add value and demonstrate the program's accomplishments. Any information contained must be specifically customized to the company and its year-end results.
Ideally, all organizations want to know how they measure up to their peer group. Insurers have access to vast resources on other companies in most industries that can be used for benchmarking studies. Risk managers should ask their insurer to illustrate how their results compare to other companies in their industry or geographic region. Areas to benchmark include total cost of risk, number of claims, and types of injuries.
Section 2: Risk management objectives and accomplishments for the current year
Profitability becomes even more difficult in today's deflationary economy. Cfos want to know how the risk management team, including the insurer, helped the company's profitability in the past year. They also want to know the planned activities and their projected impact in the upcoming year. Insurers should calculate how their activities and outcomes affected the company's earnings per share or other measurable financial criteria.
For example, consider a regional chain of grocery stores with a 2.8% profit margin. During a four-year period, the risk manager, store managers, and the insurer's claims and managed care representatives worked together and generated savings of $5.1 million, or an annual average savings of $1.3 million. The company would need to sell more than $45 million in groceries to generate this same bottom-line impact.
This section should outline the objectives that were established by the risk manager and insurer for the previous year. Next to each objective, the insurer should demonstrate how the objective can be measured and what results were achieved. Using this approach, the risk management program and insurer's performance can be easily assessed.
Section 3: Risk management objectives and strategies for the coming year
Objectives for the next 12 months and beyond need to be identified - this is essentially the reason why the insurer was hired. Risk managers select insurers who are most likely to help accomplish their goals. Strategies should be prioritized according to the effect they have on the company and its return on investment.The stewardship report should outline the plan to accomplish the risk management objectives. For example, an objective may be to reduce workers' compensation losses to $1 million at all of manufacturing plants within three years. In the report, the insurer should outline how to achieve this goal.How the company benefits from the cost associated with a recommendation must be clearly stated. Any recommendation that requires capital expenditures needs to be accompanied by the expected return on investment. Excluding life safety issues, most firms will not spend $1 to save $.50. They will not even spend $1 to save $1. Insurers need to know the risk manager's internal cost of capital.
Section 4: Results by line of coverage
Most cfos rely on their risk manager to identify and manage the company's risks. Cfos want to know that the risks are identified and proper risk management alternatives are applied. Equally important to a cfo is what is not covered. Risk managers need to understand the risks that are not insured, so that alternative risk management techniques can be applied and surprises can be minimized, if not eliminated.
A schedule of insurance should be part of this section. All coverage being purchased should be listed, along with the limits and premiums. This analysis can highlight coverage that may be changing in scope or cost. Insurers should be ready to answer questions risk managers may have on any line of coverage.
Section 5: Service program evaluation
The insurer's service program should be defined and analyzed. What services were expected? What services were delivered? How can the results be measured? This information can evaluate an insurer's promises versus performance. Discussions between risk managers and insurers on what programs are working and what may be needed in the future should stem from this analysis.
Loss prevention, claims, and managed care programs should be carefully reviewed. Each should have set goals and objectives. In the report, the accomplishments should be noted. Claims trends should be clearly outlined and discussed. Loss prevention and managed care accomplishments need to be reviewed. Insurers, brokers, consultants, and risk managers should be working in partnership to make sure the programs are accomplishing their intended purpose - creating value and reducing the total cost of risk.
Section 6: Uses of technology
Remaining competitive in the new technological frontier is a major issue for cfos. The internet is changing the way companies conduct business. Identifying new exposures and their effect on managing risks should be part of the review. Stewardship reports should highlight ways in which technology can be used to increase efficiencies, enhance service, and allow the organization to choose the most appropriate risk management techniques.
Risk management information systems are used by most risk managers today. Insurers should showcase the value of their system. Electronic commerce and communication can also be mentioned in this section. How has the insurer helped streamline the reporting or other processes by using technology? Risk managers should expect their insurers to communicate and share information electronically whenever possible.
Section 7: Legislative changes
Any legislative changes that affect the organization should be noted. Companies may not alter the locations where they are doing business because of changes in law, but they may need to modify their procedures. Important changes in the law dealing with exposures to risk should be distributed immediately, not just in the annual stewardship report.
The value of stewardship reports
An effective and comprehensive stewardship report is not an accident. Although this report is prepared by the insurer, risk managers should be intimately involved with developing the parameters of information that will be included. Well-planned and prepared reports have a tremendous value for risk managers and cfos.
According to Gary Langsdale, director of Risk Management for International Paper Company: “A good stewardship report can be shown to senior management. The best executive summaries are short, concise, and carefully constructed. Very few reports deal with the real issues. Fewer show a strategy to deal with the issues. The report should demonstrate the reasons we are doing business with the insurance company.”
Stewardship reports are created by insurers to demonstrate their commitment to helping a company manage its risks. Only when insurers understand a company's objectives and operations can they work together as partners to achieve common objectives. Annual reviews by insurers, just like annual reviews for all employees, highlight accomplishments, outline areas for improvement, and set the tone for the coming year.