Benchmarking Loss Experience In A Workers Compensation Loss-Control Program

BENCHMARKING LOSS EXPERIENCE IN A WORKERS COMPENSATION LOSS-CONTROL PROGRAM

Analyzing losses against payroll is an effective method to measure the effects of a loss-control program. The desired statistic is the pure loss rate, which you can calculate by developing reported losses for each of several years to an ultimate level and then trending these losses to a common loss date using benefit level, payroll, and medical-cost trends. Then relate adjusted losses by ratio with similarly trended payrolls for a pure loss rate for each year that can be credibly compared.

The following example demonstrates how to choose a benchmark and how to track improvements in loss experience due to the loss-control program. First, calculate pure-loss rates for five to seven years prior to the implementation of the loss control program. Second, select a reasonable pure loss rate based on the historical data.

While the average is often not a good choice as a selected rate, in this case it is a good selection because of the small range of rates. In real-life situations, the choice of pure loss rate takes considerable judgment; otherwise, the task would be assigned to a computer. In this example, the benchmark of $3.75 will be used to show the potential dollar impact of the loss-control program. It cannot show the actual impact because there will be variability from year to year, and there will always be random good and poor years.

Continuing with our example, let's assume that the program was implemented in 2003 and the results have been positive.

The loss experience for 2003 certainly looks like an improvement. The rate of $3.27 is outside the range of $3.57 to $3.94 seen in the prior five years. However, one year could just be the result of random good experience. The 2004 rate adds a lot of weight to the idea that, in fact, the loss program is working. The addition of good experience for 2005 confirms that a trend has emerged.

This is certainly good news, but how do you measure how good it really is? If you assume that all improvement is due to the loss program, then return to the benchmark pure loss rate of $3.75. The improvements for 2003, 2004, and 2005 are $0.48, $0.81 and $0.98, respectively. For every $10 million of payroll, this is a savings of $227,000 ($48,000 + $81,000 + $98,000) over the latest three years.

A unique use of this type of analysis is involved in calculating additional compensation. The group in charge of the program could receive a bonus based on a percentage of the savings. This analysis has three important caveats:

1. It takes several years before a credible analysis can be completed.
2. Improved loss experience might not be due to the loss program.
3. A system of checks and balances is needed to ensure that claims have not been manipulated.