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 Aon Global Risk Consulting’s Strategic Director, Deborah E. Weigand. “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 Weigand 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, and the systemic fixes, it should produce financial results over the longer term.
