Indirect Losses Can Really Hurt Profits
When you are thinking about ways to manage risk, you generally believe that the insurance premiums you pay represent the sum total of your insurance costs. You may need to think again.
For example, if an employee rear-ends a vehicle in traffic, seriously injuring the other driver, once your insurance carrier pays the damages you may believe the matter is closed. It’s true that damages paid by your carrier are direct loss costs, but after quantifying the costs of insurance and direct loss costs to your organization, including deductibles or retentions, you can see there are also indirect loss costs.
If you think of a claim or injury as an iceberg, you will find that the majority of the incident’s costs lie under the water’s surface. Experts estimate that the indirect costs of accidents and injuries are actually seven times the direct loss costs.
Direct loss costs are quantifiable and include insurance premiums; the amount paid to repair damaged equipment or medical costs of injuries; lost wages; fines imposed by regulators; costs to defend the claim; and deductible costs.
Indirect costs are more difficult to calculate. In fact, they may go unnoticed by your organization until you wonder what’s happening to your profits.
Indirect costs that may or may not apply include staff administrative time and cost to administer the claim and resulting damages; lost productivity and profits; the cost to hire temporary workers to meet production goals; potential failure to meet pre-injury production benchmarks and replacement or downtime of damaged equipment or tools as well as time lost by other employees impacted by the incident.
Costs also might include lowered morale that inevitably occurs post-injury, especially when that worker remains off work; staff time spent investigating and defending the claim in depositions, mediations or trial; damage to your organization’s reputation after high-profile adverse events; and business costs to relocate even though you’ve purchased business interruption coverage.
Here are several steps to help you understand these costs and reduce them.
Evaluate your last few claims. Calculate direct loss costs by considering deductibles and payments made by your insurance carrier.
Sit briefly with a few members of your team and ask them to describe the challenges they faced after the loss. It may have been disrupted production, added temporary workers, lowered morale and lost administrative time in handling the incident, which are indirect costs.
Considering this practical information, determine a plan to prevent future occurrences and reduce indirect loss costs should another event occur.
Call your insurance professionals to help you develop a plan to reduce losses.
Keep evaluating your plan to determine its effectiveness and change it as needed.
Even better … preventing loss-causing incidents from happening can save costs, human as well as the direct and indirect losses that can hurt your bottom line.