PEO Risk Management - The Value of Strategic Partners
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The Challenge
In the current economy, almost every business, regardless of size, is struggling with three fundamental questions.
- What value can I provide to my customers/clients that will differentiate me from my competition?
- How can I price competitively enough to close new business deals and retain my existing client base?
- How can I maintain internal margins with the value/price pressures I’m currently facing?
These three questions apply to every segment of business--manufacturers, contractors, and service organizations.
These questions are particularly relevant in the PEO space. PEOs at the macro level need to provide more value with greater efficiency at an attractive price point. Current and prospective PEO clients are wrestling with the same issues as they try to survive and grow their businesses in today’s economic climate. PEO strategic partners must also consider these same questions.
In the current climate, PEOs are examining every line item for potential cost savings that might result in increased margin or competitive advantage.
One strategy some PEOs have considered or implemented is creating an “internal” insurance agency to recover commissions associated with the placement of insurance products. This may or may not be a wise strategy depending on the strength of the PEO’s internal risk management program, risk financing program structure, and operating results. What may seem like a “quick win” strategy to improve workers compensation costs may end up costing much more in the long run.
The Nature of a Strategic Partnership--What is a strategic partnership?
By definition, two companies form a strategic partnership when each possesses one or more business assets that will help the other, but that each respective other does not wish to develop internally.
In the case of PEO risk management, this could mean that a strategic partner brings intellectual and technical resources to the PEO that the PEO might not otherwise own or wish to develop.
If PEO risk management were simply placing insurance products, without considering program structure and the ability to drive favorable performance, then establishing an agency inside the PEO to allow for direct placement of insurance and the ability to recover commissions would be a logical decision. However, PEO risk management and insurance programs are seldom so simplistic. Variables include the insurance carrier, the program structure, the carrier’s resources, the PEO’s internal resources, and the composition of the PEO’s client base. Often PEOs cannot achieve the results they desire because they are unable to invest in the resources necessary to build a robust internal risk management platform.
The Role of a Strategic Risk Management Partner—in this economic environment, many PEOs are questioning the strategic and operational value brought by their insurance agent and whether or not the agent’s value justifies a full commission. Again, the argument turns on what is required by the PEO and the quality of what the PEO’s agent can offer in addition to the processing of a workers compensation application and placement of insurance. The PEO industry is complex and requires risk management expertise comparable to other specialty industry groups. Size is another variable. Large PEOs with a robust internal risk management platform require less assistance than small and mid-size PEOs that may or may not have a dedicated risk manager or risk management function.
Consider the following high level comparison between a traditional agency offering services to a PEO and a risk management “strategic partner.”
A PEO strategic partner can assist PEOs in a guaranteed cost workers compensation program by supporting the underwriting process, analyzing and validating the PEO’s annual experience modification rating, providing customized risk control services, and claims oversight. These services help maintain the integrity of the PEO’s insurance program, carrier relationship and pricing model. When successful, the PEO is poised for growth and to share risk.
A PEO strategic partner can assist PEOs in a loss sensitive (deductible) model in many of the same ways as in a guaranteed cost program. The biggest difference is that when successful, the PEO may actually generate a profit from successful risk management. In a loss sensitive model, performance metrics, underwriting, risk control, and claims support become even more critical.
In the PEO industry, as in other industries, a true strategic partner will more than pay for itself through the addition of value and expertise not otherwise available to the PEO.
Small business owners may be facing excruciating pressure to make payroll and keep their businesses viable and relevant. PEOs with the right value proposition can provide significant assistance to small business clients. Like other businesses, PEOs that choose their strategic partners wisely increase their chances for success.
David E. Carothers is a Certified Safety Professional and Principal Risk Manager with Praxiom Risk Management in Tampa, FL. David is a founding and still active member of the Advisory Board to the Certification Institute for PEO Workers Compensation. He has also been a speaker at NAPEO conferences and authored several articles for the PEO Insider. Praxiom is a full-service outsourced Risk Management consulting firm specializing in PEO safety, loss prevention, claims management, and insurance placement. Praxiom works with PEO clients nationwide. Email David at dcarothers@praxiom-rm.com for comments and questions. Click here for a full bio.
