Insurance Loss Control: Concepts and Examples

Insurance Loss Control

Investopedia / Ellen Lindner

What Is Insurance Loss Control?

The term insurance loss control is a set of risk management practices designed to reduce the likelihood of a claim being made against an insurance policy. Loss control involves identifying the sources of risk and is accompanied by either voluntary or required actions that a client or policyholder should undertake to reduce risk.

Key Takeaways

  • Insurance loss control is a set of risk management practices designed to reduce the likelihood of claims being made against an insurance policy.
  • Loss control involves identifying risks and is accompanied by voluntary or required actions a policyholder should undertake to reduce risk.
  • Policyholders may benefit from loss control programs through reduced premiums, while insurers can cut down their costs in the form of claim payouts.

Understanding Insurance Loss Control

Insurance loss control is a form of risk management that reduces the potential for losses in an insurance policy. This requires an assessment or a set of recommendations made by insurers to policyholders. The insurer may conduct a risk assessment before providing coverage.

Insurers may provide policyholders with incentives to be more risk averse. For example, an auto insurance company may reduce the premium for a policy if the driver takes a driver’s education course. This means that the company will collect a smaller premium, but it also reduces the risk of a claim being filed by the insured because a trained driver is more likely to operate the vehicle in a way that is safer, making them less likely to get into an accident.

Insurance companies may also require policyholders to take specific actions in order to reduce risk. For example, they may require a commercial building to install sprinkler systems to reduce the likelihood of fire damage, or they might require the installation of a security system in order to reduce the threat of theft.

Insurance companies may require policyholders to complete loss control programs to cut down on risk and reduce the chances of claims.

Loss control programs benefit both policyholders and insurers. As mentioned above, policyholders may benefit from lower premiums, while insurers are able to cut down on their costs associated with having to pay out claims. Insurance companies identify activities that cause a claim to be filed by the insured, and attempt to reduce the odds of these activities occurring so they don't have to pay out claims and dip into profits.

Special Considerations

Insurers may offer businesses customized loss control plans. Developing these plans involves a thorough examination of a company’s operations and operational history. The examination is designed to show the causes of risk, such as unsafe working conditions. The plan then provides a step-by-step solution to mitigating that risk.

For example, a factory may use loss control consultants to understand what causes workplace injuries. The consultants may find that a particular part of the manufacturing process currently involves placing workers in situations in which they are too close to machinery. A potential solution in this scenario is to increase the distance between workers and moving parts.

Insurance Plans Required for Insurance Loss Control

The type of information collected by an insurance company's loss control consultant tends to vary. If a company has workers’ compensation insurance, a consultant may ask questions about the number of employees, practices for hiring, selection and training practices, as well as the employees' jobs. If a business has commercial auto insurance, a loss control consultant may ask questions about driver selection, training, and vehicle maintenance and inspections. If a company has commercial property coverage, an insurance loss control consultant may inspect the facility and fire protection systems.

To prepare for an insurance loss consultant visit, a business owner should collect any written risk control policies and procedures. These items may include hiring and disciplinary policies, job descriptions, drug testing policies, safety programs, training schedules or records, OSHA 300 forms, return-to-work programs, fleet safety and maintenance programs, quality control practices and fire protection inspections.

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