How Has the Economy Affected Your Firms Risk-Rating?
Economic conditions hit the world’s largest financial
superpower with Standards & Poor’s making a historic decision downgrading
the U.S. credit rating. This decision was driven by deficit and budget problems
combined with the political logjam in Washington and its inability in making the right decisions to correct
the problem.
How has the economic climate impacted your firms
risk-rating? Are A/E firms making the right decisions today to manage risk
effectively? Firms have been forced to make changes based on reduced revenues and
fewer projects opportunities. In an effort to make ends meet, firms are trying
to become more efficient with fewer resources. Difficult
decisions are being made to cut costs and overhead including reducing staff levels,
cutting and freezing salaries and reducing hours and workweeks.
Based on a recent SmartRisk Survey of design professional
firms, the following are changes firms are making driven by the economic
climate:
75%: Economic climate has had a negative impact on the firm
55%: Gross revenue down >25%
35%: Staffing reduced >50%
16%: Freezing all salaries
15%: Reduced hours and workweeks
Firms are also making adjustments to business practices and
operations. A/E’s identified the following in the SmartRisk Survey as the
biggest challenges and risks driven by economic conditions:
81%: Difficulty in getting paid for services
30%: Not obtaining proper fees for services
25%: Reduction of staff at the technical level
25%: Staff reduction negatively impacting performance
20%: In an effort to obtain work, not pushing back on
contract provisions
18%: Low profit margins driving the use of less experienced
staff
Compounding this problem is slow economic conditions often
produce an increase in litigation against design professionals based on
negligence, error, and omissions with professional liability (PL)
policies being viewed as a cost recovery asset. When making changes, it is
important firms are aware of the potential impact of the adjustments they are
making and seek guidance when making these difficult decisions.
Identifying Risks
Based on feedback from industry professionals including - A/E firms, insurance
carriers, agents, attorneys and professional associations - risk assessments
are helpful tools for identifying risks and making recommendations for mitigating
exposures. Once risks are identified, methods are indicated for
improving performance, reducing liability exposures.
Certain assessments evaluate a few risk categories
while others provide a more in-depth analysis-evaluating a number of key risks and
liability exposures at the operational level. The more detailed and helpful
risk assessments offer a comprehensive analysis of business practices,
operations and risk management strategies, as well as conduct interviews with
key personnel of the firm. It is important firms are evaluated in targeted exposure
categories based on their services and projects types.
Just like any professional service, there are different
depths and types of A/E risk assessments in the industry and the expertise by
the firms performing these assessments. Similar to the importance in selecting a specialized agent, attorney and insurance carrier, firms should use the same
selection process when selecting a firm conducting a risk assessment. Your insurance
agent and insurance carrier are good resources in providing guidance as well as having a list of approved providers.
Risk Assessment Applications
Risk assessments are valuable analysis tools and have been
used with great success in the following challenging situations:
- Changes in staffing levels
- Entering new service and project segments
- Claim history and insurance non-renewal (example below)
- Merger, acquisition or selling firm
- Claims and lowering insurance costs (example below)
- Improving overall performance and reducing risk
SmartRisk SR Risk Assessment
As mentioned, there are various types of risk assessments available
in the industry. However, based on over 25 years of experience in the design,
construction and insurance industry, SmartRisk recognized a need for a more
in-depth, comprehensive, firm specific analysis tool for design
professionals. This need caused the creation of the SR Risk Assessment - a copy
written process developed by SmartRisk.
The SR Risk Assessment has been called a “state of the art”
risk analysis tool by industry professionals that includes a qualitative and quantitative process with risk-ratings
for specific risk categories derived from an extensive examination of industry claims.
Upon completion of an in-house analysis of operations and practices including
interviews with key personnel, a firm specific SR Risk Assessment Report is
developed with associated risk-ratings (low-moderate-high) for each category - identifying program strengths
- areas of concern - as well specific recommendations for mitigating future
risk and liability exposure. Each report is tailored to each firm and every A/E firm that has gone through the process
has rated it excellent and recommends it to other firms.
A/E Firm Comments
Wade Killefer, FAIA, Principal, Killefer Flammang Architects
(www.kfarchitects.com)
said “SmartRisk performed an SR Risk Assessment of our firm identifying
potential risks and liability exposures. Based on the report, a Risk Management
Plan was developed mitigating liability exposures with specific attention given
to our higher risk condominium projects. The strategy minimized our risk and saved
our firm over $100,000 in insurances costs in 2 years. Tim is an advocate for
our firm and the industry; I heartily recommend his services to other A&E
firms.”
Nick Cinalli, PE, SECB/President & CEO, O’Donnell & Naccarato (www.o-n.com)
a structural engineering firm based in Philadelphia stated “SmartRisk’s SR Risk
Assessment process was very helpful and beneficial for our firm. It brought us
together as a group, identifying items where we should focus our attention for
mitigating risk-improving performance. We obtained favorable insurance terms
from our insurance carrier for completing the risk assessment. I would
recommend the SR Risk Assessment to other A/E firms.”
Claim History Increasing Insurance Costs
SR Risk Assessment has been very successful in helping firms
with a claim history and lowering insurance costs. One firm with several claims over the past five years obtained a significant insurance increase from their carrier. Once a risk assessment is
completed identifying recommendations for mitigating future risk, a firm
specific plan was developed with actions items and time-lines. The SR Risk
Assessment Report and risk management plan was reviewed with their insurance
carrier on the efforts that will be taken in rehabbing and enhancing risk
management practices. The carrier lowered the firm’s insurance premium the next year based
on their improved risk management efforts.
Non-Renewal of Insurance Notice
One firm was put into a very difficult position when they obtained
a non-renewal notice from their insurance carrier based on past and current
claims and expenditures. By contract, and to protect a firm’s financial
viability, professional liability (PL) insurance is needed. SR Risk Assessments
have proven to be very helpful when firms obtain a non-renewal notice. In non-renewal situations, insurance carriers stated they would even not offer terms unless an SR Risk
Assessment was conducted by SmartRisk based on the comprehensive nature of the
report. The independent risk analysis identified firm specific measures for
mitigating future risk and exposures. Based on this information, an effective
risk management strategy was developed for the firm.
Agent Comments:
Dan Bradshaw, Principal of Benchmark Insurance (www.benchmark-insurance.com)
and past President for Professional Liability Agent Network (PLAN) recently
used an SR Risk Assessment for a challenging account.
“ A client with a claim history had their Professional
Liability (PL) renewal coming up. The insurance carrier issued a conditional
renewal, meaning a rise in premium and/or deductible. Last year, no other
carriers would offer a quote or terms. An SR Risk Assessment was conducted and
presented with the PL application. Based on the reports findings and
recommendations, four carriers offered terms with several quotes 30% off the
“expiring” premium. Without the SR Assessment Report, the renewal premium would
have been significantly higher.
The SR Risk Assessment process has proven to be very helpful and I plan on
using it for several more clients in the near future.”
Keith Fitschen, Vice President-A&E Professional
Division, Marquis Agency (www.marquisagency.com)
identified several situations where conducting an SR Risk Assessment would be
helpful for his clients. "Firms that have gone through changes in staffing
(+/-), business strategy/marketing initiatives and overall reorganizations
would all equally benefit from the independent risk analysis. Further, for
those clients who have experienced an above-average claims history, conducting
a risk assessment would identify areas for improvement; reduce risk and
exposure, whilst enabling the firm to receive both more favorable insurance
terms and underwriting credits at the renewal. Now more than ever, educating
the team members across all levels should be at the center of any client’s risk
management program."
Financial Benefits
Firms completing a SR Risk Assessment have obtained financial benefits by improved
performance and profitability through implementing effective risk management
solutions. Benefits have also included lower insurance cost through favorable terms,
premium credits and/or cost-sharing by certain professional liability (PL)
insurance carriers. These financial benefits are only obtained if a qualified
professional approved by the insurance carrier conducts the risk assessment.
Insurance Carrier Comment:
James Schwartz, Esq., heading up Beazley Insurance Company's
A/E program (www.beazley.com/A&E)
for the U.S. states “from our perspective, an SR Risk Assessment is a valuable
tool. With risk management strengths, but more importantly, areas of potential
concern identified with recommendations to minimize future liability exposures,
the firm should become a better risk. Beazley offers insurance terms for
qualifying firms including a 50/50 co-sharing up to the first $5,000 incurred
if certain conditions apply.”
Conclusion
We have seen how the U.S. credit rating has been lowered based on the
governments inability to make the right decisions and adjustments. A/E firms – are you making the right decisions? Has this
economy changed your risk profile? Sometimes changes are small, made over a
period of time and difficult to see because we are so close to the issue. These
changes can be impacting a firms overall performance and increasing risks. Risk
assessments have proven to be a very helpful tool with the analysis of key
categories from an independent perspective of current industry risks and exposures. Firm
specific solutions are developed targeting areas in need of improvement.
If you are interested in obtaining more information on
SmartRisk’s SR Risk Assessments, please conduct us.
Please feel free to forward this newsletter to others who may be interested.
Thank you.