1997 RISK MANAGEMENT HONOR ROLL: QUANTIFYING COST OF RISK POWELL MEASURES, CUTS SRP COSTS

William R. Powell's belief in the old adage that you can't manage what you can't measure is evident in his understanding of Salt River Project's cost of risk.

The risk management department at SRP works closely with all departments of the utility to understand and gather information on risks and their costs.

This is not as simple as it sounds, because each department has its own standards for measuring performance, Mr. Powell said. Communication with those departments helps the risk management staff understand their mission, while conveying the need to focus on lowering the cost of risk.

"The focus is to try to get everyone to understand their function in terms of cost of risk," said Mr. Powell. "It helps them understand how they can manage their administrative costs, how they can manage their function effectively to control losses, how they can positively impact premium and costs associated with risk transfer and how they can get the most out of outside consultants or services."

Measuring the cost of risk establishes risk management's worth within an organization, Mr. Powell said. "It settles the question of whether or not you are needed," he said.

Since becoming manager of SRP's risk management department in 1991, Mr. Powell and his staff have shaved the utility's cost

of risk nearly 29% to $6.2 million a year ago from $8.7 million in 1991. SRP's cost of risk includes retained losses, insurance premiums, risk management administration costs and fees and commissions paid to brokers and vendors.

"They know exactly what their cost of risk is," said Michael J. Marsolek, senior vp of Aon Risk Services of California in Los Angeles, who places several lines of coverage for SRP. "They are quite sophisticated at tracking it, measuring it, and they are refining it all the time."

The risk management department's operating budget, premiums paid and the amount spent on loss control are easily compiled, Mr. Powell said. Determining other cost of risk ingredients, though, such as uninsured property losses, require surveying SRP departments.

A risk analyst evaluates the survey information along with company accounting records. Reports generated from that information can show the risk management department shifts in company loss patterns or areas where additional safety resources are needed, he explained.

The information can also be compared with the experience of other companies in the utility industry.

Mr. Powell attributed SRP's lower cost of risk to several key factors.

One of the biggest sources of savings came from renegotiating insurance terms and conditions while increasing SRP's retention and continued use of alternative risk financing mechanisms. Those efforts lowered its insurance premiums to $2.8 million in 1996 from $3.9 million in 1991.

Crucial risk financing decisions, such as knowing when to reduce the company's reliance on insurance and assume higher retentions, require a precise understanding of the risk costs, Mr. Powell said.

Greater management of injured workers' medical care also has paid off. Mr. Powell in 1991 created a Workers Compensation Services unit within the risk management department that now directs injured workers' to network providers who contract directly with the employer.

Arizona law allows self-insured employers to direct employees to specific providers, but in the past SRP did not exercise its right to do so.

The implemented safety and loss control measures include increased safety training, an employee safety perception survey that shed light worker concerns and attitudes, and an incentive pay plan that incorporates adherence to safety practices.

Another factor in reducing the losses has been the intense interest of Richard H. Silverman, the company's general manager.

"He is truly driven to excel in this area," Mr. Powell said. "Executive management interest and commitment has been key."

In combination with aggressive claims management and other safety and loss control steps, SRP's workers comp expenses dropped to $775,000 and 130 claims in 1995 from $1.6 million with 300 claims in 1991.

Part of the savings stem from trimming the risk management staff to 37 from 47 in the last five years, he said.

Budget reductions forced Mr. Powell to assess which positions in his department were most valuable, while an early retirement program and attrition helped reduce the staff level.

Mr. Powell also has found savings from consolidating SRP's broker services by placing additional lines of coverage, such as aviation, excess workers comp and crime, with SRP'S main casualty broker, Aon.

Even though SRP already surpasses many other companies of its size in understanding its risk costs, there are ongoing attempts to refine that knowledge.

SRP is now collecting data companywide on small, low-end property losses, such as damage to transformers. To obtain this data, the department must educate all of the company's operations personnel on the need to report small losses that are now treated as operating expenses.

"They're really trying to get it right down to the gnats eye," said Aon's Mr. Marsolek.

Once SRP's risk management staff has enough data on those smaller losses, they will look for patterns that might lend themselves to new loss control efforts.