Controlling claims

March 2006 » Business
As a provider of professional liability insurance to geotechnical, environmental, and civil engineers, Terra Insurance Co., had conducted surveys to identify the causes of its insureds' common liability problems.
David L. Coduto

A survey of engineering firms reveals seven critical factors for business success

As a provider of professional liability insurance (PLI) to geotechnical, environmental, and civil engineers for more than 35 years, Corte Madera, Calif.-based Terra Insurance Co., had conducted surveys, similar to other PLI companies, to identify the causes of its insureds’ common liability problems. However, more than nine out of every 10 Terra policyholders had not experienced a serious claim. So, we decided to turn the tables and survey the best of the best to learn what they were doing right.

We asked selected firms to provide extensive underwriting data and then submit to interviews. The results were astounding, allowing us to identify seven "critical success factors," or CSFs. We define CSFs as those business practices, actions, ideas, concepts, and theories embedded within a firm’s management structure and culture that are essential to that firm’s success in controlling claims and other loss costs.

Terra owner/insured firms with the lowest loss ratios over an extended period commonly exhibit the following seven principal, interrelated CSFs (in no particular order): 1) refined corporate culture; 2) competent staff; 3) nonautocratic work environment; 4) financial fortitude; 5) a culture that places importance on client and project selection and assigns accountability for those selections; 6) rapid response to problem situations; and 7) participation in business-focused, outside organizations.

Refined corporate culture

Successful firms define their corporate culture during strategic planning, creating a "culture statement" that sets forth the firm’s philosophy. The culture statement should respond to questions such as, "What are we?" "What is our business philosophy?" and "What are we trying to achieve?" The culture statement needs to be in writing—disseminated to all employees, discussed by all, understood by all, and applied by all. It also must evolve in response to changes in the environment in which the firm functions. A firm’s culture statement should serve as the metric by which all of the firm’s activities are evaluated, permitting any member of the firm to ask, "Does what I am about to do comport with our firm’s culture?" Competent staff—Maintaining a highly competent staff is essential to success. Firms that do it well regard each new hire as the start of a mutually rewarding, long-term relationship. Toward that end, they develop a comprehensive job description for each position, analyze resumes, and conduct background checks to verify applicants’ claims about education, professional degrees, and responsibilities at prior positions. And because the best firms know that a resume seldom provides information about the characteristics they value most highly, they spend a great deal of time on the interview process, asking questions to learn what makes applicants tick. Quality-focused firms also are willing to pay higher salaries and offer better benefits than their competitors, knowing it helps them attract and keep the best people on staff. They understand that paying more now means paying less later, given the high cost of turnover.

Nonautocratic work environment

Too many firms do little to overcome the communication "fear factor" that causes problems to go unacknowledged and undiscussed until it’s too late. By contrast, the best firms create a nonautocratic work environment—a workplace that attempts to eliminate blame and fear, encouraging a free flow of ideas and communication among all personnel at all levels, even when the opinions expressed are contrary to senior management’s. The best of the best hold frequent "brown bag" sessions and staff meetings to foster regular interaction and communication between the people in the trenches and the people in the office.

Employees know when a firm has created a nonautocratic work environment; they feel it every day on the job, encouraging them to develop a personal interest in improving the quality of the firm’s services and deliverables.

Financial fortitude

Financial fortitude is a financially mature attitude coupled with financial wherewithal. As a general rule, firms that possess financial fortitude focus on the long-term impact of their decisions. They have the financial maturity needed to abide by their convictions, and the financial resources necessary to weather short-term setbacks. For example, knowing that liability can linger for decades, they research clients and projects thoroughly before accepting either. They do not accept engagements from clients that do not appreciate the need for quality or that cannot afford it. They do not agree to a contract whose scope or schedule is insufficient in light of the project’s risks, whose terms and conditions are unfair, or which establishes rates that do not generate an adequate return.

Firms with financial fortitude are wise enough to know that, to maintain a competent staff, they have to spend more money during the hiring process, for salaries and benefits, and on staff education and training.

They also realize that our economy is cyclical, that good times cannot last forever, and that "what goes up must come down." By preparing for the inevitable, they are able to weather the troughs.

Financial fortitude also can be an important problem-solving tool. For instance, when a firm’s leaders realize that the firm created or contributed to a problem that developed on site, and that they may be able to take care of the problem by performing additional services, they immediately proceed to provide the additional services without worrying about short-term issues such as how and when they’ll be paid.

While achieving financial fortitude can be a lot easier when a firm is well-heeled, many well-heeled firms do not achieve it because they are not financially mature.

Firms that are not financially mature will find it more difficult to achieve financial success and, if they do, to maintain it.

A culture that places importance on client and project selection and assigns accountability for those selections

Financial fortitude is particularly important because it comprises the backbone of this CSF, which, stated another way, means turning away business. The importance of doing this—when warranted—cannot be overemphasized. The prospect of making quick money has always nurtured undue optimism, which is why it’s not enough to track sales successes. The most successful firms hold even their best "rainmakers" accountable. These firms link compensation, bonuses, and advancement to the firms’ long-term profits (factoring in the cost of claims), not just to individuals achieving or surpassing annual production targets. These firms do not tolerate inadequate pre-acceptance evaluations that result in a disproportionate number of slow-pay accounts or claims because of clients or projects they should not have accepted to begin with. Some business is bad business. A firm’s leadership needs to make that clear.

Rapid response to problems

Many of the best firms sponsor special training to help their project managers spot the early symptoms of a problem, for example, cessation of communication, slow pay, or a fee dispute. Once they realize a problem exists, they take swift action. Some have even established a protocol on how to assemble a rapid-response, problem-solving team led by one or more senior managers who, typically, had no role in the project in question and are empowered to make technical and financial decisions on the firm’s behalf.

Participation in business-focused, outside organizations—Some of our most successful insureds have involved key personnel in outside organizations that address business management, including loss prevention and risk management. In fact, Terra believes so strongly in this CSF that we require our policyholders to become active members of ASFE/The Best People on Earth. In our experience, the ASFE programs are extremely valuable, especially organizational Peer Review, in which all Terra owner/insureds must participate on a regular basis. We also require our owner/insureds to attend at least one of ASFE’s two national meetings each year.

Conclusion

Terra concluded from its research that firms succeed in many ways when they make the seven CSFs vital elements of their corporate culture and operating structure.

The CSFs must be known, understood, and appreciated by all employees—professional, technical, and support personnel.

Firms will reap the benefit of fewer, less serious claims; a lower rate of employee turnover; a higher rate of profitability; and other positive outcomes that typify a wellrun firm. In short, the seven CSFs are good habits to get into.

Sidebar: Terra Insurance

Terra Insurance Co., is a risk retention group (RRG) and, as such, only the company’s insureds may own the company’s stock, and all insureds must be investors.However,Terra was not always an RRG. For its first 19 years, the company reinsured its owner/insureds’professional liability insurance (PLI) exposures as an offshore company headquartered in Bermuda.

Terra converted to RRG structure in 1988, soon after Congress passed the enabling legislation.

Profit is important to Terra’s owner/insureds because it helps them minimize the cost of insurance. Insureds’ real cost of a Terra policy is the premium they pay less the value of their stock’s appreciation, making Terra one of the lowest-cost PLI providers in the market. A.M.

Best Company, the nation’s leading rating organization of insurance companies, regards Terra’s stability so highly that it has given the company a stated rating of "A, Excellent," and an implied rating of "A++, Superior."The 35th anniversary in 2004 of Terra’s founding makes it the only carrier to offer PLI to geotechnical, environmental, and civil engineers for such an extended length of time.

David L. Coduto is president and CEO of Terra Insurance Co., Corte Madera, Calif. He can be contacted at 1-415-927-2901.


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