Can best practice or Lean behaviour reduce insurance costs when insurance is a global commodity market? In theory, yes it can. In practice, like insurance, it is a subjective science but there is evidence that best practice does make a difference. Will Stirling reports.
Best practice, Lean, effective management, world class manufacturing – call it what you will, these techniques encourage operations that contribute to a safer, more efficient, less wasteful working environment. But do they actually reduce insurance costs? The easiest component of Lean to apply to insurance is health and safety (H&S) practice, which feeds into risk management. Here the relationship is clear. A cleaner safety record equals lower premiums, in most cases.
Steve Pountain, head of business governance at Ultraframe, conservatory manufacturers and 2009 winners of the international lean award the Shingo Bronze Medallion prize, says that “although safety was not one of the key drivers at the time Ultraframe embarked on its Lean journey, it has been proven over the last four years that there is a strong correlation between Lean implementation and improved safety performance. Relationships can be drawn between Lean principles such as 5S, Visual Management and Standard Operating Procedures, along with elements of the Seven Wastes (TIMWOOD), mainly Transportation and Movement, and a reduction in lost time accidents.” Is there a measurable cost saving? He adds: “It’s hard to put a financial figure to the reduction in lost time accidents, but it is safe to say that Lean Safety has helped the bottom line with regard to cost reductions in the areas of First Aid provision, Occupational Health Nurse reliance and employee liability insurance reserves.”
Secondary or tertiary role
How much do other best practice factors affect insurance? For example, practices that improve quality can result in reduced premiums.
“Conventionally, a company with substandard quality assurance will result over time in more product liability claims, is more likely to have lower housekeeping standards, and will be worse for employee safety,” says Mike Still, managing director of UK National at insurance brokers and risk advisors, Marsh. “As a result you would expect higher numbers of incidents that injure or cause illness or disease to employees.
These will directly affect the products and employers’ liability premiums.” The experience for some companies is that lean or good practice appears to have a secondary, tertiary or indeterminate effect on insurance premiums which they think their insurers are not directly considering when assessing.
One manufacturer in Wales checked the key metrics with its insurance company and found the biggest contributor, unsurprisingly, was general insurance market conditions, i.e. the sector within which your business is based and the liability to be undertaken with its activities. Subordinate to this, however, accident or incident claims performance in the previous period can have a secondary influence, which might include product quality loss claims insurance too.
“Clearly effectiveness of management systems influences one’s “loss-behaviour”,” says the company’s improvement director. “This includes use of classically lean behaviour such as: 1) effective plan-do-checkact (PDCA i.e. closing the loop) in a safety context to ensure similar accidents are not repeated, and effective risk assessments and; 2) activity influencing quality loss and claim; understanding customer value; six-sigma to reduce quality variability and increase consistency.
These factors were taken into consideration in the underwriting.” Lower down still, “a visually wellorganised business (using e.g. 5S) may reduce the likely list of fire system recommendations. This may make it easier to make an assessment and also gives a good subjective impression.” The spokesman added that before it was bought out, there was one example where the company had shown improvement of close-out on safety related incidents on the previous year, through the introduction of rapid PDCA database systems.
According to his colleague who worked there at the time this had a direct influence on the insurance premium and affected its claims threshold.
Broking best practice
One insurer’s underwriting methodology for a given set of criteria will differ to another’s. But there are quarters of the market that do factor in a range of best practice variables, as well as the macro factors like reinsurance rates and prices driven by normal commodity market conditions.
EEF Insurance Services (EEFIS) is a scheme run by EEF, the manufacturers’ organisation, and RK Harrison Insurance Services. It was launched in July 2007 in response to escalating premiums and because, EEF says, companies felt they weren’t being rewarded for the investments they had made in health and safety processes to reduce their risk. It comprises a panel of four UK insurance companies: Allianz, AXA, Norwich Union and Travellers. They promised to give additional benefits such as improved cover, membership discounts and rebates, but perhaps most importantly commit to recognising best practice in their premium terms.
The broker and panel developed a scorecard which provides a benchmark against three or four main headings, to provide an overall score of good business practice in that company. “It’s a red-ambergreen scoring. Red does not mean you can’t get a quote, it just means a green risk should get a better price than a red or amber risk,” says Stuart Rootham, director of R K Harrison Insurance Services. The process as a virtuous circle, Rootham says, where companies’ weak areas are identified and EEF can provide the means to fix them through its H&S consultancy. “To a company who’s a red or amber whose premium terms today are X, we’re able to identify those areas where it needs to improve. An EEF assessment can help you with that. Everyone benefits.” It shows companies, which must be EEF members to participate, that if they improve these areas their premium terms will improve in the future.
“It incentivises firms to take action if they’ve got more to do and it ensures that those who’ve done a good job already get the best rates possible,” he adds.
R K Harrison claims that companies who have adopted the scheme regularly save 15%-30% off their existing premiums, up to 46% in one case, and one company saved over £100,000.
What value waste, inventory?
Some companies have little to show for their Lean behaviour where insurance is concerned. Andrew Bradley, managing director of safety equipment manufacturer Unitex UK Ltd, which has implemented a very thorough lean programme, says its efforts here have not been reflected in insurance costs. “We have discussed our Lean operations with our insurer over a number of years, indeed it is part of the prerequisite body of information they assess. They appreciated the improvements we’ve made in areas like waste and inventory reduction but it has made no obvious difference to the premium.” Unitex UK is having its insurance overhauled later this year and Bradley would like to see the new policy take its Lean efforts into account.
E2v, a designer and manufacturer of specialist components and subsystems, has been through a very rigorous business process overhaul over the last 18 months. But its insurance company, when it comes up for renewal, indicated that of its multiple improvements its inventory reduction might affect its premium, but there was no substantial reduction that reflected the business process improvements at the Chelmsford-based firm.
Spell it out
The four manufacturers we canvassed said they had not investigated the effect of Lean operations on insurance in great depth and were keen to know if they were missing an opportunity. What can be done to maximise your company’s good practice on insurance costs? R K Harrison’s Rootham says insurance companies are not manufacturing experts and you must emphasise your strong areas in any submission. “The broker should know the questions to ask, it really isn’t down to the client,” he says. “The broker’s submission to insurers should articulate all the operations and practices used on site that might lower insurance costs. Don’t be afraid to tell your broker or insurer everything you think is salient, even if you think they’ll think it’s irrelevant. The EEFIS scheme includes a lot of best practice.” Will insurance prices rise in 2010? Some think yes, after benign conditions and price competition over the last five years have driven prices down, insurers need to make up lost ground. Others say no, that driven by reinsurance rates there is still significant capacity and competition in the market for insurers to make profits without raising premiums. “You’re unlikely to see rate increases coming through this year,” says Marsh’s Mike Still. This is sector specific though; banks certainly have bigger premiums today.
“In food manufacturing, for example, some insurers have seen their rates reduce significantly over the last four years, but brokers still see claims coming in and they are now trying to push premiums up, or reduce some of their exposure. The issue is there are still alternatives in this market that are highly competitive so Marsh is not seeing those increases coming through other than for companies that are not well risk-managed or those that have a claims history.” He adds that it’s more important than ever today to prove all best practice quality behaviours to insurers to ensure that the premium discounts given to the best-run companies are capitalised on.
What is clear is that the insurance industry needs to better communicate which components of Lean – H&S, quality assurance, waste and inventory reduction – are included in their metrics and with what weighting.
Schemes like the EEFIS show that some insurers value a wide scope of best practice activities.
