Safety expenses are often viewed by executive management as overhead expenses that are "bad", as they don't add direct value to the customer (or business). Chief financial officers tend to focus on cost control by reducing costs that don't directly contribute to making money for their company.
However, successful companies evolve their thinking from cost control to cost optimisation.
When it comes to safety, according to The Cost of Risk Survey, the costs can be broken down into:
- Net insurance premiums, commissions and fees,
- Non-reimbursed losses (self-insured, self retained),
- Risk control and loss prevention expenses, and
- Administrative costs
Despite senior management often seeing these as "grudge buys", that add no value to the company, the opposite is true. In fact, the return on investment is greater than one might think.
Let's take a look at two different approaches to saving money on safety costs.
Improving safety to reduce insurance premiums
By undertaking the right tasks to improve safety (eg: risk analysis, training etc), companies can save up to 50% off their insurance premiums. This means decreasing your risk from an average of 0.75% of company sales (for a poor performing company), down to 0.5% or 0.25% for really good safety performance.
So for a company with $1 billion in sales a 0.75% risk would be equal to $7.5 million per year versus $2.5 million for a company that performs well in safety. Check out "How to Sell Safety Benefits to Senior Management" for more information.
But while there are financial benefits from reducing insurance premiums and other associated safety costs, there are other stronger, more important reasons to improve your company safety performance.
- Better morale - By reducing the amount of employees being injured and by staff no longer seeing their mates being injured, or even worse, killed, company morale can greatly be increased. It even extends to equipment no longer breaking down which means work gets delivered on time, so employees are happy, customers are happy and suppliers whose supply is constant rather than being stopped due to breakdowns are also happy.
- Improved company reputation - Business growth is assured when customers are able to get their deliveries on time, there are no more product recalls and staff stop spreading bad stories about how the company treats its staff.
- Increased profit - By improving you safety risk, your insurance premiums and cost to the business will go down.
By actively looking at ways to improve safety, you will automatically reduce your safety costs over time, but more importantly generate a happy, motivated workforce.
Manage your risk - don't transfer it
A company that can manage its workplace health and safety risk will be much more profitable and dynamic than a company that simply swaps dollars with an insurance company. After all, by managing workplace health and safety, companies start to optimise their costs. This is because they are managing their risk and improving the company which is the key to business success.
Companies that choose to purchase insurance are just passing their risk onto an insurance company. Over time, as they are not doing anything to improve safety, instead preferring to "swap risk" with an insurance company, their safety performance deteriorates, insurance premiums go up until finally the insurance companies will decide not to ensure them anymore.
What companies need to consider, is that instead of purchasing insurance, they should put their insurance premium money aside and use it to invest/ improve safety (by doing more training, purchasing safety equipment etc). Examples include spending the capital upfront and maintaining equipment, as well as using the money to implement a good risk strategy. By managing risk well, companies can then self-insure and invest. This will work towards building an asset within the company.
As Donald Eckenfelder mentions in his book , Values-Driven Safety, "self-insured entities probably represent the most enlightened industries when it comes to a healthy perspective on funding and preventing losses".
Companies are never going to win using insurance to cover them for poor safety management.
In Australia, worker's compensation is compulsory, but by improving your safety risk it will mean your premiums will stay down, while competitors who choose not to work on safety will face increased insurance costs.
Risk Management Services
Conducting an impact analysis of your business is vital. Many businesses do not have their "risk appetite" aligned or effectively communicated with business strategy, day to day operations, decision making and risk taking.
Once you pay that annual insurance premium, this money (known as "risk capital") is lost to the business forever.
To optimise your risk capital expenditure, and not waste critical capital, you need to understand how efficient your current insurance program is in transferring the 'insurable risks" you do not wish to retain and manage to insurance companies.
To find out how you can do this, download the case study below.