Author: Vija Kelly
Date of Publication: 19.04. 2006
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SAFETY COSTS IN THE NEW ECONOMIC ENVIRONMENT

When most business managers and executives think of the potential losses in the safety area, the first things that come to mind are the cost of accidents and the cost of OSHA fines. While both are legitimate concerns, in today's marketplace if those are the only concerns given attention, there is a good chance that the company is going to be bleeding red ink. Insurance costs are rising. Profit margins are slipping. Any excess and unexpected costs can make the difference between profit and loss. Let's take a look at some of the concerns business owners, executives and managers need to address.
One of the big expenses that every company must budget for is workmen's compensation insurance. Although never an insignificant expense, a number of factors have kept this cost in line the last several years. First, the insurance market was "soft". This means that there were a number of insurance companies competing for the same customers, keeping rates lower. Because of the competition in the market place, insurance coverage was not difficult to obtain. And, the cost of coverage could be controlled by having a low "mod rate", the accident experience rating which had a direct effect on how much one paid for insurance.
Although, adjustments for accident experience, of course, are not going to go away, changes in the insurance marketplace will have a major impact on the first two factors. Insurance companies are now in financial pain and they are looking to control costs and avoid losses. The harsh reality is that net income for insurance companies dropped 13% in 2000 and two-thirds of insurance stock lost value. The insurance industry's surplus dropped another 9% in 2001. For every dollar insurance companies earned, they were paying out $1.11. Court settlement of claims has increased in dollar value by more than double since 1994. On top of these changes came the attacks of September 11.
The losses sustained by insurance companies are going to affect the cost of insurance and the availability of insurance. Both factors will have a direct impact on any bussiness's bottom line. Insurance premiums are likely to rise ten to thirty percent. Where the cost of premiums is controlled, coverages will be curtailed, less coverage for higher cost. Moreover, insurers are likely to drop coverage for companies where they perceive a greater risk for outlay in claims-even though there have not yet been any claims.
In this new environment, safety and loss control are going to have to move from the back burner to the front burner. Executives and managers are going to have to look beyond their accident experience and look at whether or not their safety programs can actually reduce their exposure to, not only the expense of accidents, but rising insurance costs and decrease in insurance availability. The latter means that insurance costs for companies where the risk is perceived to be greater will be proportionately higher.
Proactive approaches to safety and health programs are going to require a new way of looking at things. For example, it may be necessary to weigh a one time capital expenditure against long term potential losses in insurance claims-i.e, does the cost of new material handling equipment outweigh the potential for ergonomic injury claims down the road? If an insurer is concerned about the possibility of claims for musculoskeletal injuries in a workplace, the investment makes sense. As in this example, the employer may have to take a look at the workplace in terms of vulnerabilities and how these may be reduced or eliminated.
Another part of this new approach may have to be looking at how an employer can demonstrate commitment to ensuring a safe workplace. Here, the written programs, that are required by OSHA, may also serve to document all of the company's efforts. As with OSHA compliance, the written programs need to be living documents which reflect what is actually happening on the production floor. Lockout/tagout procedures in a book that are demonstrably not followed on the shop floor are not going to be very helpful. A regular review of all safety programs, written and otherwise, can help a company stay on top of safety and loss control efforts.
In addition to auditing the workplace to identify vulnerabilities and documenting all safety efforts, employers should also seriously look at incorporating safety issues into all planning, whether this planning involves facility changes or purchasing. Incorporating safety issues into all planning can have serious cost saving benefits. We had a graphic example of this revealed in a recently conducted compliance audit. The company concerned had spent thousands of dollars in rearranging the shop floor and laying out their production equipment. They neglected, however, to take safety and compliance considerations into account. The four major aisles than ran through the plant did not lead to a single exit! Moreover, not a single exit could be seen from any spot on the production floor. The cost of redoing the production floor again will probably be prohibitive. This means that the company will have to spend thousands of dollars on striping the floor and putting in signage to indicate paths to exits. And, this cost could be small compared to the costs that might arise if a serious accident occurs and Emergency Medical Personnel cannot easily navigate the shop floor to assist the victim.
The marketplace has changed tremendously in the last year. With the economic slowdown and the changes in the insurance industry, employers need to engage in long term thinking and proactive planning to ensure profitability. Neglecting safety issues in this process can be a critical mistake.