What is Your Acceptable Level of Workers Compensation Risk?

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1 October 2013 A PMA Companies Thought Leadership Publication What is Your Acceptable Level of Workers Compensation Risk? Knowing this answer and targeting your loss prevention program around it can transform your organization s safety initiatives. Member of Old Republic Companies

2 What is Your Acceptable Level of Workers Compensation Risk? Jack Aspen Vice President, Risk Control Services, PMA Companies With workers compensation pricing rising, employers are increasingly looking at loss-sensitive workers compensation programs as a solution. With a loss-sensitive product, your organization can potentially realize lower costs by assuming a greater proportion of your workers compensation financial risk. A well-designed and managed loss-sensitive program can offer significant benefits including increased cash flow, lower costs, and improved claims outcomes for a business and its workers. In a loss-sensitive program, with increased risk assumption and your organization paying for a portion of your claims expenses, you need to be especially vigilant about containing loss costs. If left unmanaged, these costs can derail your program and impact your bottom line. In this Executive Brief, a follow-up to PMA s white paper, Maximizing the Value from Loss-Sensitive Workers Compensation Programs, we ll focus on one of the most important areas of containing loss costs: loss prevention. We ll explain how the concept of acceptable level of risk impacts your organization s loss prevention program and what you can do about it. Why Your Acceptable Level of Risk Is Important An acceptable level of risk describes how much loss your organization will tolerate. Of course, the highest standard is, No loss is the only acceptable outcome. However, you need to plan for and manage what is probable: an expected rate of loss. Establishing an acceptable rate of loss is important, as it will help you confidently set measurable targets for your loss prevention program. You can then budget for and make the appropriate capital investments to achieve those targets. Loss Prevention: A Strategic Approach Unfortunately, some organizations take a rote method to loss prevention. Each year, they orchestrate similar programs (whether it is inspections, training programs, etc.) that are not targeted to address their specific loss history. This rote method approach lacks the horsepower to achieve measurable results. 2 What is Your Acceptable Level of Workers Compensation Risk?

3 To conduct a program that makes a real impact, you first need to understand where your losses are coming from and what s driving your costs. Start by evaluating your company s workers compensation claims history. Calculate your rate of loss, e.g., number of claims per $1 million in payroll. By calculating your frequency of claims occurring over time, you can use past trends to better predict future outcomes. Loss data varies widely by industry and occupation. For example, in 2011, the rate of non-fatal, lost-time occupational accidents was 117 per 10,000 full-time workers in 2011 or 1.2%, according to the Bureau of Labor Statistics. If you examine the data through an occupational lens, you see occupational groups with higher (e.g., Healthcare Support occupations reported cases per 10,000 full-time workers in 2011) or lower (e.g., Management occupations reported 43.5 cases per 10,000 full-time workers in 2011) rates of lost-time cases. When investigating an organization s loss trends, do not simply rely on overall workers compensation claim frequency statistics. Drill into the data to determine the occupations you employ with high claims frequency. You can access data for your industry through the Bureau of Labor Statistics (BLS), your workers compensation carrier, and other sources. Keep in mind your rate of claims and incurred losses are influenced by many factors, including: Industry Jurisdiction Access to medical providers and networks Availability of modified work Age of employees Physical condition of employee Many companies stop the analysis here. However, you need to dig much deeper. To develop an effective program based on actionable data, examine the following in your loss history: Specific loss trends, e.g., employees in Department X report a higher rate of fall-related claims during the second shift Your company s loss drivers, such as medical expenses and pharmacy costs for injured workers Profiles of injured workers, including factors such as a worker s age and physical condition Next, consider what s ahead. Start with a thorough, real-time workers compensation risk assessment that evaluates your facilities physical conditions and existing workplace safety program. SEE CHART B ON FOLLOWING PAGE FOR DETAILS. Establish Specific, Measurable, And Achievable Goals for Loss Prevention Based upon your analysis and assessment, establish specific, measurable, and achievable goals for containing losses and reducing the frequency of losses. 3 What is Your Acceptable Level of Workers Compensation Risk?

4 When setting goals, consider the following: Is my organization allocating sufficient resources to loss prevention? What amount of resources should my company invest to prevent accidents? What will be our return on investment for loss prevention initiatives? Are the loss prevention initiatives we select and invest in generating the greatest return for our organization? Could our money be better spent elsewhere? How effectively does my organization capitalize on external resources, such as an insurance carrier s loss prevention services? By establishing goals, an organization is accepting a level of risk and determining a baseline to implement an effective plan to contain losses within selected targets. Risk Assessment Tools and Resources The following sources can provide valuable risk assessment tools and resources: Occupational Health & Safety Administration (OSHA): This regulatory agency offers excellent tools to help you assess risk and comply with standards ( Insurance Brokers and Agents: Insurance brokers and agents can play an important role, investigating their clients coverage needs by evaluating their businesses and listening to their risk concerns. Workers Compensation Carrier: An effective carrier thoroughly investigates an organization s specific risk characteristics when underwriting accounts. The assessment provides insights to underwriters to craft an insurance solution for you. It can also contain very valuable information to help you develop a strategic loss prevention plan. Ask to meet with your underwriter or loss prevention consultant to learn more about the assessment. CHART B Managing your Acceptable Level of Workers Compensation Risk: A Three-Point Plan To ensure that your organization achieves its targets, from a loss and financial perspective, execute the following: 1 Start with Workers Compensation Fiscal Planning A loss-sensitive program s financial structure needs to be aligned with your organization s unique financial needs. A program needs to be reexamined and modified annually to ensure it is still the best fit for evolving financial realities and business objectives. Based upon your assessment, you may need to readjust your program structure at your next renewal. The key is to balance how much you want to pay into an insurance program against what the potential out-of-pocket expenses an organization can ultimately incur. Maximizing the Value from Loss-Sensitive Workers Compensation Programs provides further information on this topic and is posted on 2 Carefully Determine Your Occupational Safety and Health Risk Management Capital Investment Evaluate the three primary strategies to reduce workplace losses: A. Engineer out risk exposures. By investing capital to eliminate a workplace hazard, you greatly reduce the potential for an incurred loss associated with that hazard. Implementing controls such as purchasing new equipment or modifying the design of your facility incurs capital expense. However, over time, you can potentially generate a greater return than your upfront investment and perhaps even achieve a better or equal rate of return than your other financial investments. B. Provide personal protective equipment. Devices that provide eye and face protection, respirators, hearing protection, gloves, and safety shoes are important in protecting employees from hazards. Generally, personal protection controls are less expensive than capital investments; however, they carry a greater level of risk since the employee is still exposed to a hazard. 4 What is Your Acceptable Level of Workers Compensation Risk?

5 C. Employee training. Providing employees with the knowledge and skills to reduce risk is essential for any loss prevention program. Compared with capital investments and personal protection, training as the sole means to control loss is the least effective strategy. An integrated program is best. For example, consider a scenario in which office employees are experiencing conditions that present risk for low back pain. Procuring an ergonomically-correct chair and providing training on its proper use is more effective than: Providing the chair with no guidance; or Offering a training program on proper sitting techniques with no enhancements to existing furniture or equipment. By investing capital to eliminate a workplace hazard... over time you can potentially generate a greater return than your upfront investment... 3 Use a Targeted Loss Prevention Approach Maximize your investment with a targeted approach to loss prevention based upon your loss analysis and goals. Structure your program to directly address your claims frequency and severity issues. For example, a company may have five locations with an average lost-time claim frequency of 1.5 claims per $1 million in payroll. A goal may be to reduce their acceptable level of risk to 1.25 claims per $1 million. When developing your plan, it s imperative to consider two statistics. The first is incurred loss per $100 of payroll. This measure of loss can be compared to industry standards. Although this information can be difficult to come by, work with your insurance broker and carrier to research these rates. The second set of figures is your range of incurred costs per claims. A company s approach to loss management/ prevention is far different when dealing with 10 claims all costing $15,000 to $20,000 each (average $18,000 per claim) versus a company with nine claims at $5,000 each and one claim incurring $135,000 (average $18,000). In the first scenario, the organization is managing a clear trend of higher-cost claims. Investigation is more likely to find root causes for the claims and a subsequent action plan is likely to reduce the frequency of claims and incurred costs. In the scenario of one high cost claim, it is not as likely that the company is dealing with a trend. Oftentimes there is no clear action since the event is less likely to be repeated. Organizationally, a single high cost claim will get noticed. At times, government or municipal agencies will inspect a work site and could issue fines. High-cost accidents are newsworthy and could require an organization to take corrective actions to assure brand reputation. With your insurance broker and carrier, develop a detailed plan that outlines how you will achieve your acceptable level of risk. Throughout the year, monitor your plan closely to enable you to intervene and make adjustments as needed. CASE IN POINT: Target Your Loss-Prevention Dollars for Maximum ROI A nursing home client with facilities throughout the eastern United States faced increasing lost-time claim frequency in the four years prior to selecting PMA as their workers compensation carrier. PMA Risk Control conducted a detailed loss analysis and customized risk assessment of their locations. Twenty-one percent of the locations were found to be driving the losses. ACTION STEPS: Based upon PMA s analysis and assessment, the client directed resources at the loss-producing exposures, particularly improving patient handling procedures and general facility operations management. Results achieved in three years: Targeted locations achieved a 50% lost-time claims frequency reduction Client s overall organization achieved a 17% lost-time claims frequency reduction Based on actual case study. 5 What is Your Acceptable Level of Workers Compensation Risk?

6 Additional Strategies to Maximize Your Loss-Prevention Program Workers compensation challenges continue to be numerous. The level of control you can exert over the costs associated with workplace accidents is increasingly compromised by emerging issues such as the aging workforce and the increased use of narcotic drugs prescribed to injured workers. To maximize your control in this environment, we recommend additional actions that positively impact your cost of risk: Execute good employee recruiting and hiring practices, and orientation programs to help to assure your company is hiring workers who will buy-in and adhere to safety programs. Enhance employee engagement with education and job recognition programs to promote greater job satisfaction and reduce the potential for claims. Demonstrate leadership commitment to maintaining a safe work environment with management actively observing, recognizing, and demonstrating safe work practices. This will set the tone for the company. Establish a culture of safety in which safety considerations are factored into every business decision. Offer wellness programs to help your aging workforce stay healthy and improve the well-being and productivity of your entire workforce. Learn how you can help maximize insurance carriers pharmacy benefits management program to help address narcotics abuse among injured employees. Also, evaluate your compliance program. Organizations must comply with federal, state, and local regulations regarding worker safety. Adhering to these regulations can have a positive impact on your loss outcomes. However, don t limit your loss prevention to compliance and avoiding violations, particularly if your compliance areas are not aligned with your loss drivers. Conclusion Establishing an acceptable rate of loss is an important part of a risk management program, particularly for clients with loss-sensitive programs. Organizations need to manage their acceptable level of risk and assume a level they can afford. An acceptable level of risk serves as a baseline to implement an effective plan to contain losses within selected targets. You can then budget for and make the appropriate capital investments to achieve those targets. An organization s leadership team can then be held accountable to these goals as they would any other critical objective. Determining how much risk to assume is a critical decision that many organizations do not sufficiently evaluate. However, making the right decision carries significant potential for financial gain and the opportunity for a positive impact on a company s brand and reputation. 6 What is Your Acceptable Level of Workers Compensation Risk?

7 About PMA Companies PMA Companies ( provides risk management solutions and services in the U.S., specializing in workers compensation and offering property and casualty insurance. A member of Old Republic Companies, PMA Companies is headquartered in Blue Bell, PA. Old Republic International Corporation (NYSE: ORI) is one of the nation s 50 largest publicly held insurance organizations. PMA Companies includes: PMA Insurance Group, specializing in workers compensation, and providing other commercial property & casualty insurance products PMA Management Corp. and PMA Management Corp. of New England, providing results-driven TPA and Risk Services specializing in workers compensation and liability About the Author Jack Aspen is Vice President, Risk Control Services, PMA Companies. He leads PMA s Risk Control Services, which takes a business-driven approach to loss prevention by helping clients make the right decisions to maximize their return on investment in safety. Mr. Aspen and his PMA Risk Control colleagues have set the bar in the industry with the introduction of innovative programs and service offerings, including specialized industry loss prevention teams, decision-based safety management, advancements in industrial hygiene and occupational health, on-line cost-effective training for clients, aging workforce solutions, and PMA Websource, a 24/7 online portal of safety and risk management resources. With 26 years of experience in the loss prevention field, Mr. Aspen has a Bachelor of Science degree in Mechanical Engineering and a Master of Engineering degree in Industrial Engineering from Pennsylvania State University. He holds Certified Safety Professional (CSP) and Associate in Risk Management (ARM) designations. 7 What is Your Acceptable Level of Workers Compensation Risk?