I was recently asked to consider whether and how effective workers’ compensation reporting really was and whether or not anyone had a truly helpful and effective view into true WC cost of risk (COR) and its related trends. In fact, having spent much of 2013 meeting with key risk and HR leaders throughout the U.S., I can confirm that many of these functionaries need and want more useful risk reporting in most areas of exposure. They want to go beyond what most consider the “standard” risk metrics to those that really reveal the trends that are often not readily apparent with “standard” measures.
Arguably, depending on your industry and the size of your company, employee injury costs are often the largest component part of total cost of risk (TCOR). Since most risk managers measure their hazard costs using TCOR (among other methods of course) it seems logical to look more closely at how workers’ compensation costs are specifically measured and how effectively those metrics are at measuring success. We should start with that very question: what is success in this realm and how do we get key stakeholders to care more about these costs?
In my experience, senior management in some larger companies pay scant attention to this area of expense. While it may be that the entirety of risk management gets similar limited attention in these same companies, we’ll leave that for another time. Let’s proceed on the assumption that TCOR matters to stakeholders and that WC is the largest component driver of this measure. Can companies afford to ignore an expense that may represent 1-5% of revenues with the larger companies reflecting lower ratios? On its face, one would hope not, but we should not stop there.
What about the cost of lost productivity from employees not available to perform their jobs, in whole or in part? It’s been estimated that this “indirect” cost component represents from 2 to 9 times “direct” costs. Translating that to more meaningful dollars, and using just the midpoint of the estimated direct and indirect cost ranges (3% and 5.5%), we get an estimated “total” cost impact of each direct WC loss dollar spent, of 16.5 cents (3 x 5.5). The full range using these same estimates would be 2% to 45% of top line revenues (1% x 2% and 5% x 9%). The tail of this range may seem absurd to many observers, but that is in fact the point; we don’t often take into account the full impact of disabled employees and by extension its maximum impact. I would further suggest that key senior stakeholders, whether the C-suite, the board or operations management, may have little understanding of this true cost of workers’ compensation risk regardless of how often they see WC metrics. Clearly they need more information to make key decisions related to this risk.
So while there are a few entities that do a fine job of parsing and reporting on mass WC data, allowing for some comparison and benchmarking, some of these efforts reflect a more dated historical view and focus more on how states are performing against each other than on how companies are performing relative to their own short- and long-term strategies for maintaining a motivated, productive workforce.
I will elaborate more on the specifics in my related article soon to be published in the Risk & Insurance Magazine “WC Forum,” but for now, let me suggest that the big opportunity may be to not only take full account of the indirect costs typically related to lost productivity, but to find a more focused way to marry the myriad of WC cost data with the various exposure data. When paired and analyzed effectively, this will tell a more comprehensive and useful story about how the underlying risk can be best managed for the benefit of the enterprise and its mission.
Chris Mandel, SVP, Strategic Solutions