Many companies’ retained risk costs — claim costs paid by the firm — are the largest component of their total cost of risk, often representing two-thirds or more of the total costs. Unfortunately, they are also often some of the most difficult costs to measure and evaluate.
“Most of the time, costs are benchmarked around the time of the insurance policy renewals, when premiums are known or are being quoted,” says Jennifer Bell, the managing director, president and COO of Aon Risk Services Northeastt, Inc. “Retained loss costs take several years to develop and safety initiatives often involve 18 to 24 months or longer from implementation to the realization of financial results.”
Smart Business spoke with Bell about how to measure your risk costs accurately.
What are the most important factors in measuring safety and claim performance?
The first critical factor is to ensure that those responsible for safety and those responsible for claims are measuring the same results based on the same metrics. If the safety department uses one set of measures and the claim or risk management department uses a different set, the organization can end up having disparate reports with no real measure of progress. This happens in organizations where, for example, OSHA statistical data is the primary measure of safety performance. OSHA rates may be positive, while claim costs are stagnant or climbing.
Another important criterion is the same time frame for measures — that is, costs are evaluated at the same ‘age’ or loss development. If the total expected payout of claim costs is used, reputable and consistent actuarial projections are critical. Finally, the measurements must be normalized. If a company has faced a reduction in sales, payroll or headcount, the cost needs to be reported in a fair comparison with historical exposure.
What are some of the better measures to use?
Cost is the ultimate measure, and it should be employed within the parameters above. However, other measurements can also provide earlier indications of progress, including:
- Open claim inventory. Viewed in conjunction with costs, this will provide a fair indication of whether the cost data is valid. If costs are down but open inventory is growing, it can be a sign that costs are underrepresented.
- Meaningful accident reports with identification of sustainable system improvements. While this is a qualitative measure, if an organization examines the systemic problems producing accidents and costs, it should produce financial results over the longer term.
How can companies prepare an open claim inventory?
An open claim inventory is available from a company’s carrier or third-party administrator. They can provide a report annually or semi-annually to look at the percentage of total claims that are currently open. If that percentage is growing, that can be an indicator that the long-term cost projections may need a second look. Ideally, the open claim inventory is shrinking, but it should be at least maintained at a relatively steady level.
What are some examples of better, more meaningful accident reports?
That is tough to measure quantitatively, but certainly qualitatively, someone in management can review the accident reports that are coming in from time to time and ask whether the corrective action will address only the reported specific situation, or if it will address the cause from a system standpoint.
If the correction was, ‘I told the employee not to do that again,’ that’s not a systemwide fix. If the correction was, ‘We changed the procedure and the tooling so that it’s not necessary to do that again,’ that is a system fix.
What are some indicators that your organization may have discrepancies in safety, claim and retained loss costs?
- Claim counts exceed recordable incidents by more than 10 to 15 percent.
- An increasing number of claims are reopened from closed status.
- Incentive programs report success, with rewards delivered consistently, but there is no reduction in incurred costs.
- A growing percentage of the work force is working with accommodated duty due to restrictions, or has been awarded permanent restrictions If this number is higher than about 5 percent, it may indicate overaccommodation of restrictions.
- The average claim duration — time the claim remains open — is steadily increasing.
How does the data disparity between OSHA rates and claim costs happen?
Many companies have used OSHA rates because they are easy to compare across locations. However, in the last six to eight months, there have been some fairly critical reports from academic and government entities specific to workers’ compensation and OSHA data. OSHA has taken notice; it launched a directive in March to begin an investigation into these recordkeeping issues because of the disparity. We are now seeing effects of OSHA’s recognition of the discrepancies with investigations and recordkeeping audits.
How can the disparities be prevented?
Claim and safety personnel should be evaluated on consistent measures. Cost factors and loss reduction efforts should be integrated, with prevention efforts expressed in terms of reduction in expected loss or exposure. To prevent the disparity in OSHA recordkeeping, one needs to ensure that the OSHA log is accurate and is cross-checked from time to time for that accuracy. If that is done, then the OSHA records and the claim records should align within a reasonable percentage — probably 80 to 85 percent. If there are swings of 40 or 50 percent between reported claims and the log, that should raise eyebrows.
Jennifer Bell is the managing director, president and COO of Aon Risk Services Northeast, Inc. Reach her at (216) 623-4110 or firstname.lastname@example.org.