Risk Management Strategy and

Performance Metrics

NAPEO Risk Management ConferenceTampa, Florida

Introduction

• Session Objectives– Discuss the strategic role of Risk Management inside your

PEO• Determine whether or not Risk Management is a “service” or a

“product”

– Provide an overview of PEO Risk Management• Strategy• Positioning• Financial Performance Metrics• Macro Program Performance Metrics• Micro Program Performance Metrics

We Sold Our AIG Stock and Bought A Coastal View Retirement Home

You Might be a Redneck if…(Jeff Foxworthy)

• Your richest relative buys a new house and you have to help take the wheels off of it

• Your lifetime goal is to own your own fireworks stand

• Your dog and your wallet are both on a chain

• You have more than two brothers named Bubba or Junior

You Might be a PEO Risk Manager If…(The Voice of Experience)

• Your idea of being entertained is collateral return discussions with your broker and carrier

• You have a different insurance carrier in each region of the country

• You are single handedly the underwriting, risk control, claims, and policy administration functions

• Your picture is on a dartboard in the sales VP’s office

Strategy/Positioning(A Vital PEO Function?)

• Why is Risk Management important to PEO clients?

– 98% of businesses in America today have < 100 wses– 87% of businesses in America today have < 20 wses– 50% of all workplace fatalities occur in businesses with

< 100 wses– 33% of all workplace fatalities occur in businesses with

< 20 wses (statistics based on NIOSH White Paper)

PEOs are uniquely positioned to provide critical risk control and claims management services to their clients

Strategy/Positioning(A Vital PEO Function?)

• Effects of the Economy

– Human Resources Risk due to layoff, termination, etc…– Use of the workers compensation system in lieu of health

benefits (especially if benefits are not offered)– Use of the workers compensation system to replace

unemployment benefits

PEOs can add value beyond traditional risk management assistance

Strategy/Positioning(Barriers)

• Issue: Geographic client spread/average client size Question: Where are my clients?

• Issue: Effective, scalable service platform to effectively reach clients

Question: What value proposition can I offer?

• Issue: Budget constraints/limited internal resources and staff Question: What’s the right service model and staffing level

for my client base and operating budget

Strategy/Positioning (Barriers)

• Issue: Insurance carrier platform Questions: – What’s the carrier’s financial strength (rating)?– What support can the carrier provide?– What is the carrier’s admitted geography?– What is the carrier’s underwriting appetite? What authority does my PEO have?

Strategy/Positioning

• What’s troubling CEOs?

– Sustained and steady top line growth (is Risk Management adding to or detracting from this effort?)

– Speed, flexibility, and adaptability to change

– Customer loyalty /retention

(2004 Conference Board Survey—539 respondents)

Strategy/Positioning

• Do you want risk management to be a sustainable competitive advantage or a contestable competitive advantage?

– Program Components• Carrier Quality and Plan Design• Value Proposition• PEO Risk Management Operating Platform• Client experience

• In either case, competitive advantages erode over time and must stay fresh

• What will you excel at? What won’t you do?

The “Myth of Excellence”(by Fred Crawford and Ryan Matthews)

• Five Customer Touches—Price, Service, Access, Product, and Customer Experience

• No company (even excellent companies) can perform at a level of excellence in all five areas at once

• Dominate in one area, differentiate in one area, and meet the industry par in the remaining three areas

How Will You Achieve “Excellence”?

• Carrier Reputation/Relationship

• Excellent Service—Claims and Risk Control

• Ease of Doing Business—Underwriting Approval

• Coverage Design— National Platform

• Client Experience and Stewardship

MR2P(Managing Risk to Profitability)

• Early PEOs—depended on workers compensation arbitrage in their pricing models

• Today’s profitable PEOs– Recognize the importance of high quality, long-term carrier

relationships– Strive to implement “best in class” risk management

practices– Manage workers compensation as a “product” with a

profit/loss mindset

$how Me the Money(If I’ve Got To Do This)

Financial Performance Measures

• Total Cost of Risk (TCOR)

• Loss Ratio

• Expense Ratio

• Risk Management Income Statement

Total Cost of Risk

• Losses due to Accidents (fully developed)

• Program Costs (reinsurance, claims handling expenses, carrier loss control, taxes, etc…)

• Agent/Broker Fee or Commission

• Internal Staff expense (administration, claims management, risk control, etc…)

Financial Performance Ratios

• Loss Ratio = losses/premium (what’s acceptable?)

• Expense Ratio = expenses/premium

• Combined Ratio = losses + expenses/premium

These are common ratios used by carriers in evaluating their performance—why should you think differently?

Risk Management Income Statement

Revenues

PremiumConsulting Fees (if any)

Total Revenues

ExpensesLossesProgram CostsAgent/Broker FeesInternal Expenses

Total Expenses

Profit/Loss

Challenges in Current Environment

Issue: Premium reductions in certain states are resulting in substantially less program revenue

Results: 1. Higher loss ratios 2. Higher expense ratios—staffing costs remain constant or increase 3. Less pricing flexibility 4. Compressed margins

Mental Health Break

Macro Performance Measures

• Table of Truth

– New Claims Frequency– New Claims Reporting Lag Time– Claims Closing Rate– Loss Ratio

• Exposure Base

New Claims Frequency

Number of New Claims per period X 200,000/# of hours worked

What it tells you: a. Is the number of claims per 100 full time employees

increasing or decreasing over time? b. Where does my program stand with respect to BLS benchmarks?

Response: Focus on accident prevention/risk control programming and service delivery

New Claims Reporting Lag Time

Measure the percentage of claims reported within 24 hours of the injury to the carrier

What it tells you: a. The effectiveness of your medical care delivery system

b. How seriously your client (s) are viewing their safety and workers compensation responsibilities

Response: Focus on pre-injury management program to include provider network, injury reporting requirements, and accident investigation

Claims Closing Rate

Percentage of Claims Closed by Policy Period

What it tells you: a. The attention your claims handler (carrier or TPA) is

paying to claims generated by your clients

Responses: a. Periodic audits to determine claims handling effective-

ness, reserving practices, and closing strategies b. Determine performance criteria and issue a monthly numerical scorecard to each claims handling office with a copy to the carrier’s claims liaison

Loss Ratio

Losses for a period divided by premium for the same period

What it tells you: Whether or not your book is performing in a profitable manner

Responses: a. This is the “bottom line” performance measure. Revisit each of the items previously listed for effectiveness b. Reevaluate your risk selection process c. Evaluate individual client performance (next section)

Micro Performance Measures

• Individual client performance

• Client “watch list”

• Client compliance with risk control practices

• Field risk control activities to control and grow the book of business

Why Bother—What’s in it for Me?Goldman Sachs/JBWere Study

(October 2007)

“Research shows that over the period November 2004 to October 2007 companies who did not adequately manage workplace health and safety issues underperformed those who did…

“investors could have increased returns over the past four years had they incorporated WHS measure into their investment strategies (+38%)…

“This approach is also appealing because “blow ups” caused by something such as poor WHA or governance may pose unacceptable risks due to the reputational risks being often disproportionately large for issues of this nature.”

Hint: Think PEO Valuation

“A mind once stretched to a new idea can never return to its former shape”

--Oliver Wendell Holmes

So…

What’s your strategy?

Risk Management – a “service”, a “product”, or a “necessary evil”?

“A Parting Shot”