INSURANCE: Looking for Losses Improves the Bottom Line

Joseph Catanese

In business, looking at losses certainly isn't fun. However, loss analysis can provide valuable insight into why costly insurance claims happen and as a result, help improve the bottom line.

A comprehensive plan that outlines and compares costs and numbers of similar claims incidents, loss analysis allows companies to focus its resources and help control costs. For example, understanding the origin of workers' compensation claims can help a company focus in areas that need correction.

During loss analysis, businesses pool data to identify trends, such as work activities, location, employees, equipment, materials and environmental conditions commonly associated with accidents. This data can be used to develop a risk management plan, including environmental, health and safety programs, to target the causes of losses. Also, a loss analysis compares costs and determines whether or not a business is on par with industry standards. The Bureau of Labor Statistics (BLS), Washington, D.C., provides these standards.

A thorough loss analysis should include a goal; company or location covered in the data set; data source, i.e. loss reporting database; Occupational Safety and Health Administration (OSHA) logs or other data; and the time covered, no less than 12 months, but often two to three years.

Typically, two to three years provides enough trend data. However, at a minimum, the time covered should include more than 100,000 hours worked, preferably more than 200,000 hours to allow for statistical stability.

However, if a company has less than 20 claims annually, then a multi-year analysis is recommended. But if more than one year is being combined for the analysis, make sure the operations were relatively similar. For example, if two companies merged, the data for the year before the merger would not be included because they weren't the same organization.

Once claims data is gathered, summarize claims and dollars incurred in:

1. Work tasks involved;

2. Equipment, materials, personnel and environmental conditions;

3. Injury type;

4. Part of body injured; and

5. Location.

The categorized data should tell a story. For example, four eye injuries resulted from hydrochloric acid splashes at the drum filling line, or two vehicle accidents resulted.

Businesses where accident frequency and severity exceed BLS averages or other waste industry statistics are economically disadvantaged compared to their competitors.

To perform a frequency and severity rate comparison, obtain a copy of the completed OSHA 200 Log for the current and past two calendar years, the total hours worked for all hourly and salaried employees, and the average number of employees. The number should not include weekends (unless the employees work weekends), vacation and sick leave - even if employees were paid.

If the location only keeps records of the hours paid, or if employees are not paid by the hour, then estimate the hours that the employees worked.

Then, use the data in the following equation:

Number of Cases x 200,000

Incidence Rate =

Total Hours Worked by All Employees

Number of Lost Time Cases x 200,000

Severity Rate =

Total Hours Worked by All Employees

Comparing a company's accident and illness performance to its competing SIC (Standard Industry Code) can be a powerful tool to develop health and safety programs.

Keep in mind that loss analysis, depending on the methods used, can portray a distorted view of actual loss. To ensure accuracy:

* Don't use percentage numbers to reflect increases or decreases in claims unless there are more than 50 claims reported;

* Don't draw conclusions based on small data sets;

* Don't single-out individuals or injured parties to depict the overall exposure;

* Don't let the loss analysis turn the discussion into a claims investigation;

* Don't identify a particular claimant's name, age or sex; and

* Don't center loss analysis on the claim-reserving practices.

* If performed correctly, conducting a loss analysis can objectively identify the types, location and costs of workers' compensation claims. More importantly, the process can help businesses develop a targeted plan for action to reduce further loss.