Measuring success

December 4th, 2003 by

I’ve always thought that a company that is serious about controlling workers’ compensation costs and losses must be serious about measuring its performance, or else how will success be known?

The problem with traditional measurement protocols is that they take years to develop in order that conclusions can be drawn with any level of actuarial certainty. The four-year development of experience modification is the standard measure. Loss data for a given year does not enter the mod calculation until eighteen months following the close of the policy year, and the modification, itself, reflects three years experience. This fails to give management a timely opportunity to reverse unfavorable trends. If you are an employer, you need something better and quicker.

There are more user-friendly methods that employers can use to keep abreast of the status of their programs at any given time. We recommend tracking the data continuously and posting results monthly.

Over the next five weeks, I’ll post some of the methods we’ve found to be most effective at Lynch Ryan. If you’re an employer, perhaps you’ll find them useful as you search for ways to track the performance of your own injury management program. Feel free to post any comments – we’d like to hear what you think.

This first posting in the series will focus on Cost of Losses per Full Time Equivalent Employees (FTE).

The single best economic indicator of the effectiveness of a workers’ compensation cost control program is Cost of Losses per FTE. It provides an economically sound snapshot of program success at any given time. Oftentimes, employers have little control over whether workers’ compensation statutory premium rates rise or fall. Yet, individual employers can control whether their own losses rise or fall. Tracking the cost of losses per FTE is the best way to measure the status of the overall cost control effort.
To determine the cost of losses per FTE, first factor out the variability of part-time and overtime work by dividing the total number of hours worked by all employees in a one year period by 2080 (a 40-hour workweek times 52 weeks) to arrive at the number of full time equivalent employees. Then, divide the total cost of losses during the same one year period by the total FTE count.

Regardless of industry or geographical location, your annual Cost of Losses Per FTE should not exceed $100.

You can track the Cost of Losses Per FTE on a quarterly or monthly basis by substituting 520 or 173 for 2,080, respectively.

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