Lately, there has been discussion in the blogoshere about workers’ compensation metrics, what do you measure, how often, do you focus on accidents or injuries, lost time or lost dollars, how deep do you drill down in management reporting, and the list goes on and on.
Because performance measurement is such a serious issue, I’d like to offer a perspective gleaned from working with national account and middle market employers, as well as insurers, for more than 25 years.
Performance measurement should have four characteristics: It should be simple, it should be meaningful, it should be consistent and it should be continuous.
By simple, I mean easily and quickly understood by senior management. Meaningful means that it should sit in senior management’s sweet spot; it should be something that is anticipated and valued by leaders. It should be consistent, because those leaders, once trained to view performance in one way, do not appreciate abrupt course changes. And to be effective over the long term, it has to be a continuous and routine process. The mantra should be: What is consistently well-measured is highly valued.
With this framework in mind, I usually recommend that monthly reports to senior management measure two things religiously: Incurred losses per full time equivalent employee (and this should be done by department, division and company) and incurred losses per every hundred dollars of payroll (again, split out by department, division and company). Before any measurement occurs, however, management should settle on targets, which should be a bit of a stretch, but attainable. And target selections should be set against actual performance in the prior three or four years. For instance, if costs per FTE have been in the $200 to $300 range in the last few years, a good target would be a reduction of 30% to 40% in the current year.
Senior managers have finite attention spans. Therefore, workers’ compensation performance measurement should fit on one page, a Scorecard that senior management can assimilate in no more than a few minutes. If the information is pithy enough, that’s as long as it should take, but it should also lead to fruitful discussion about management actions to enhance performance, discussion that comes out of knowledge.
There are many other solid and valuable workers’ compensation metrics, but, in Lynch Ryan’s experience, these two are the ones that senior managers appreciate the most.
All of this assumes, of course, that a serious and ongoing safety, workers’ compensation and injury management program is humming along, and that all parts of the organization have been trained in how to keep it that way. To quote the Bard, “Ay, there’s the rub.”
Posts Tagged ‘metrics’
Workers’ Compensation Metrics: Creating a One-Page Scorecard
Monday, November 30th, 2009Massachusetts Premium Rates Redux
Monday, November 23rd, 2009My blog post of last Thursday (19 November 2009) addressing why workers’ compensation costs in Massachusetts are the lowest in the nation, while benefits are among the highest drew a mild pushback from Mark Walls, who manages the excellent LinkedIn Workers’ Compensation Forum. Mark wrote:
“Working for an excess carrier, I would never have expected Massachusetts to be considered a “low cost” state. In Massachusetts you cannot settle medical, and there are COLA’s on the lifetime benefits. In my world, it’s a high cost state.
I guess it’s all about your perspective.”
And he’s right- it is all about perspective. Mark also wrote, “I’m a claims guy,” and the blog post in question was all about premium rates. Sometimes, what appears logical when looking at claims can appear illogical when viewed through the prism of premium rates.
I can certainly understand why claims professionals in Massachusetts might be a bit frustrated, because not being able to settle the medical portion of a claim, along with having to contend with annual Cost of Living Adjustments, tends to obliterate predictability.
The perspective Mark mentions changes, however, when one considers a workers’ compensation program unique to the Massachusetts voluntary market, a program that substantially increases premium collected in the state while not driving up premium rates: the All Risk Adjustment Program, or, as it’s better known, the ARAP Surcharge.
In all 38 NCCI states, the ARAP, a sort of second experience modification that penalizes severity more than frequency, exists as the Assigned Risk Adjustment Program and is found in the Residual, but not in the Voluntary, market. This is supposed to provide even more of an incentive for employers in the Pool to do the right things to get themselves into the voluntary market. It’s a debit mod only. In Massachusetts, however, the ARAP can be found in both the Residual and Voluntary markets. If an employer in the Voluntary market has a high experience modification, it will also most likely find itself with an ARAP surcharge, anywhere from 1% to 25%, which is applied to the standard modified premium.
For example, say a company in the Voluntary market has a manual premium of $100,000, an experience modification of 1.5 and an ARAP of 1.2. The resultant total premium will be $180,000. Think of the $30,000 ARAP charge as compound interest. This means that Massachusetts premiums are more sensitive to losses than premiums in other states, even “loss cost” states.
And why shouldn’t an employer with high claim severity pay more for workers’ compensation? Why should employers with low claim severity subsidize those with high claim severity? Although many in industry abhor the idea of the Voluntary market ARAP, it seems to me that Massachusetts is doing the fair and reasonable thing.
In 2007, ARAP surcharges in Massachusetts brought in additional premium of $60 million, or about 7% of total premium in the state. However, this should decline fairly significantly in 2008 and going forward for two reasons:
• First, until 2008, the maximum ARAP surcharge was 49%; in 2008, the maximum was lowered to 25%;
• Second, Massachusetts has been hard hit by the recession, causing payrolls to decrease substantially; lower payrolls result in lower premiums.
The Massachusetts Workers’ Compensation Rating and Inspection Bureau is now engaged in the monumental task of putting together a rate filing to be submitted in 2010. It will be interesting, indeed, to see to what extent lowering the maximum ARAP surcharge from 49% to 25% impacts the filing.
Compare your workers compensation losses with others in your industry
Wednesday, March 3rd, 2004Marsh offers an interactive tool to let you compare your workers comp losses with others in your industry. It entails entering a few bits of information, and it then generates bar charts that depict industry numbers and your variance from the norm. Of course, it’s a rough benchmark, but it still offers an industry-specific yardstick, and most of us are eager to see how we measure up to our peers. The site has other interactive tools too – test your liability limits, or benchmark your Directors & Officers liability.
The site also has a library of articles on various business insurance issues, including one entitled Controlling Workers’ Compensation Costs. Here is an excerpt:
“The average cost of a claim involving an employee who lost time from work was $30,000 in 2002, according to data gathered by Marsh. In the aggregate, these costs have a big impact on an employer’s bottom-line. A business with $100,000 in workers’ compensation losses and a one-percent margin (such as in retail) needs to generate $10 million in sales to pay its workers’ compensation claims.”
Obviously, we think the best way to forestall these punishing costs would be to prevent claims from occurring in the first place; Marsh suggest that employers view workers comp initiatives in terms of pre-loss and post-loss initiatives. They offer their views on an effective claims management component:
“To address post-loss issues, employers may need to sharpen their focus on the injury and claims management processes. This could involve establishing consistent policies for reporting claims and procedures for dealing with workplace injuries and providing medical referrals. A key element in any employer’s post-loss activities involves implementing a return-to-work policy that gives employees an opportunity to begin working on a modified schedule as soon as they are physically able. Transitional or temporary work programs offer significant benefits to the employee and potential cost savings for the organization.”
At Lynch Ryan, we are ardent believers in the need to measure and benchmark losses against the industry and also against a company’s own performance over time, so we are happy to see this handy tool from the folks at Marsh. If you haven’t visited the Marsh site lately, you might find some valuable risk management or HR resources.
Measuring Success 2
Tuesday, January 6th, 2004As I’ve said previously, a company that wants to have low workers’ compensation costs has to have effective ways to measure the performance of its safety and injury management efforts. In December, I wrote about the Cost of Losses per Full Time Equivalent Employees (FTE). Today, it’s time to talk about the Severity Rate.
In nearly all cases, time away from work drives the cost of losses more than any other determinant. This is why modified duty plays such a vital role in controlling costs. Therefore, the severity rate, which measures lost time, becomes the single best non-economic indicator of the overall effectiveness of a company’s workers’ compensation program. So, what is it, and how do we calculate it?
The severity rate is the number of days away from work due to workplace injury or illness per 100 full time employees (FTEs) per year. It sounds daunting, but the Department of Labor has made it easy to get and use this data.
For more than thirty years the Occupational Safety and Health Administration (OSHA) has required most companies to maintain what is called the “OSHA Log.” On this report, every workplace injury and illness is recorded along with the resulting time away from full duty, as well as time spent on restricted duty.
Every year, each company required to keep the OSHA Log sends a copy of it to the DOL, which includes it within a national database maintained by its Bureau of Labor Statistics. The BLS collates data from each Standard Industrial Classification (SIC Code) and publishes an annual national average rate of time away from work, or “severity rate,” for each SIC Code.
To calculate your severity rate, divide the total number of days lost due to occupational injury or illness by the total number of hours worked by all employees. Following this, compare your severity rate with the average for your SIC, published annually by the BLS. Remember, the average for your SIC is nothing more than the middle of the bell curve; it is neither good nor bad. You should set for your company a goal of maintaining a severity rate that is 50% less than your industry’s average.
