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In Depth: Workers' Compensation

Capturing the Best Data

Determining total cost of risk has value; getting your hands on the right data set is the challenge.
By: | October 12, 2017 • 7 min read

For a well-organized risk management department, collecting the array of expense data needed to calculate the total cost of risk for its workers’ compensation program should be fairly straightforward.

But aggregating all the desired data is often challenging for employers, particularly when it must be collected from various workers’ comp service providers who may use different formats for tracking the information.

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Expense information maintained within the risk management department might also be tabulated in different ways, depending on factors such as whether contracts call for paying flat fees or per-claim charges, further complicating matters.

“Some self-insureds and some insureds with large deductibles will have significantly different sources, or places, where the data might be kept in terms of what can be included in the total cost of risk number for workers’ comp,” said Bill Zachry, a longtime risk manager and senior fellow at the Sedgwick Institute.

“It’s one of the challenges in doing it well,” he added.

Other risk managers evaluating their total cost of risk, or TCOR, for workers’ comp, however, don’t find a need to seek data from many sources, depending on their goals and program structures.

Carolyn Snow, director of risk management at Humana Inc. and the 2014 Risk and Insurance Management Society Inc. president, relies on a TCOR analysis to help allocate workers’ comp expenses — insured through a captive — to company business units.

Information used to calculate her TCOR includes excess insurer premiums, third party administration claims-management expenses and the cost of time spent conducting claims reviews.

Bill Zachry, senior fellow, Sedgwick Institute

She obtains other TCOR input data from Humana’s business units and considers the cost of lost productivity when workers are absent due to workplace injuries. But that leaves little need to collect information from other sources.

“We don’t use a lot of outside information” to calculate TCOR, she said.

Regardless of the degree of the challenge in collecting data, a TCOR analysis is a powerful tool for a workers’ comp program and well worth the effort required to uncover it, veteran risk managers and other observers agree.

They encourage other risk and workers’ comp managers to gain a deeper understanding and better ability to manage the real cost drivers behind their workers’ comp spending by conducting a TCOR analysis — even when some expense information needed for a solid analysis must be based on estimations.

“I always felt that it was very valuable as a risk manager to understand what my TCOR was,” Zachry said.

Digging Deep

Many workers’ comp claims payers, however, focus only on learning their insurance and claims adjudication costs, forgoing the opportunity to examine how all the pieces of their program truly impact costs and claims outcomes, TCOR proponents argue.

“It doesn’t happen nearly as often as we would like it to,” Patrick Walsh, executive VP and chief claims officer at York Risk Services Group, responded when asked how often risk managers request York’s help to obtain information needed for a TCOR analysis.

“Full disclosure, [a TCOR analysis is] not an easy exercise to do right.” — Patrick Walsh, executive VP and chief claims officer, York Risk Services Group

But when risk managers dig beneath the surface of their workers’ comp program to really understand their total cost of risk, they can discern how to optimize their role and improve program elements, Walsh said. They can learn, for example, what practices really motivate employees to want to return to work as soon as possible following an injury.

“When you do get someone to the table and have the discussion about total cost of risk and really focus on outcomes and what processes will get you those outcomes, it can actually be a fun discussion,” Walsh said.

“You start talking about things that really matter and the roles an employer can play in the claims process.”

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TCOR is a key measurement for decreasing workers’ comp variable claims expenses, explained George Pallis, director of marketing and analytics for the national accounts division of Travelers.

“Some customers focus too much on the fixed cost component,” of their program, Pallis said.

But fixed costs, or insurance purchasing expenses, typically amount to 20 to 30 percent of a program’s overall expense with the remainder of overall costs variable.

“The real opportunity to improve the overall cost of risk is the variable loss component,” or claims expense, Pallis said.

“We try to get [customers] to focus on the variable loss component because that is where we can bring our claims handling expertise and risk control practices … and really impact that total cost of risk number.”

Focusing on reducing TCOR in that fashion is not only good for the customer, it also contributes to Travelers workers’ comp book of business, achieving a combined ratio that beats the average for its industry by 11 percent, Pallis said.

Accessing the Data

But Walsh said he knows also that uncovering an accurate TCOR may be challenging for employers, especially for those purchasing multiple workers’ comp services “unbundled” from a variety of vendors.

“Full disclosure, [a TCOR analysis is] not an easy exercise to do right,” Walsh said.

“It does require a lot of effort to pull the data in from the [disparate] pieces of the puzzle. Some of it is relatively easy. The claims data should be easy to get. Some of the service data, especially if it is bundled, will be easy to get.

“If it is unbundled, it might be a bit of a struggle to get it in a way that you can pull it all together easily.”

Pallis also noted that employers unbundling a variety of claims services might find a TCOR analysis more challenging.

“You have to go to different places, and it might be difficult to quantify total cost of risk,” he said.

Patrick Walsh, executive VP and chief claims officer, York Risk Services Group

In some cases, though, calculating a workers’ comp program’s TCOR may not be difficult when information such as loss data, actuarial reports and departmental budgets are readily available in an organized format, said Joe Picone, casualty claims practice leader at Willis Towers Watson.

“It’s difficult if your protocols for storage of costs and budget [data] are not well defined,” Picone added.

“A well-organized risk management department will have access to most of their costs.  If your organization isn’t capturing TCOR inputs on a regular basis in a centralized manner, it could be cumbersome.”

The fewer components included in a TCOR analysis, the easier the computation task may be.

But that also increases the likelihood that a less-than-optimal final analysis will encourage program changes that don’t improve costs or claims outcomes, observers said.

Productivity Losses

Potential TCOR components are significant expense considerations, yet are very difficult to precisely measure.

One tough item to calculate are the productivity losses employers suffer when injured workers miss work.

Despite the difficulty of attributing a precise number to productivity losses, experts say it is valuable to include it in a TCOR analysis, even if it’s an estimation.

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“That is where you are going to reach a point where you are willing to make some assumptions reasonably based on data you do have,” Walsh said. “But I think ignoring that is a mistake.”

Snow, the director of risk management at Humana, agrees. While she does not have precise measurements for productivity losses, she does consider the cost when thinking of her company’s TCOR for workers’ comp.

To overcome the challenges, Walsh suggests an honest evaluation of what matters to an employer, what they want to accomplish and make assumptions where necessary.

But document those assumptions so that they can be replaced with data as it becomes available, he said.

Also collaborate with both broker and TPA, as each may have a role in implementing improvements suggested by a TCOR analysis.

“The moment one of those parties [is not included] is the moment you are going to have a problem accomplishing your goal,” he said.

“Because if you decide after your analysis that the goal is to get one party to do something faster or better, it is still incumbent on the other parties to help them reach that.” &

Roberto Ceniceros is senior editor at Risk & Insurance® and chair of the National Workers' Compensation and Disability Conference® & Expo. He can be reached at [email protected] Read more of his columns and features.

More from Risk & Insurance

More from Risk & Insurance

Cyber Resilience

No, Seriously. You Need a Comprehensive Cyber Incident Response Plan Before It’s Too Late.

Awareness of cyber risk is increasing, but some companies may be neglecting to prepare adequate response plans that could save them millions. 
By: | June 1, 2018 • 7 min read

To minimize the financial and reputational damage from a cyber attack, it is absolutely critical that businesses have a cyber incident response plan.

“Sadly, not all yet do,” said David Legassick, head of life sciences, tech and cyber, CNA Hardy.

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In the event of a breach, a company must be able to quickly identify and contain the problem, assess the level of impact, communicate internally and externally, recover where possible any lost data or functionality needed to resume business operations and act quickly to manage potential reputational risk.

This can only be achieved with help from the right external experts and the design and practice of a well-honed internal response.

The first step a company must take, said Legassick, is to understand its cyber exposures through asset identification, classification, risk assessment and protection measures, both technological and human.

According to Raf Sanchez, international breach response manager, Beazley, cyber-response plans should be flexible and applicable to a wide range of incidents, “not just a list of consecutive steps.”

They also should bring together key stakeholders and specify end goals.

Jason J. Hogg, CEO, Aon Cyber Solutions

With bad actors becoming increasingly sophisticated and often acting in groups, attack vectors can hit companies from multiple angles simultaneously, meaning a holistic approach is essential, agreed Jason J. Hogg, CEO, Aon Cyber Solutions.

“Collaboration is key — you have to take silos down and work in a cross-functional manner.”

This means assembling a response team including individuals from IT, legal, operations, risk management, HR, finance and the board — each of whom must be well drilled in their responsibilities in the event of a breach.

“You can’t pick your players on the day of the game,” said Hogg. “Response times are critical, so speed and timing are of the essence. You should also have a very clear communication plan to keep the CEO and board of directors informed of recommended courses of action and timing expectations.”

People on the incident response team must have sufficient technical skills and access to critical third parties to be able to make decisions and move to contain incidents fast. Knowledge of the company’s data and network topology is also key, said Legassick.

“Perhaps most important of all,” he added, “is to capture in detail how, when, where and why an incident occurred so there is a feedback loop that ensures each threat makes the cyber defense stronger.”

Cyber insurance can play a key role by providing a range of experts such as forensic analysts to help manage a cyber breach quickly and effectively (as well as PR and legal help). However, the learning process should begin before a breach occurs.

Practice Makes Perfect

“Any incident response plan is only as strong as the practice that goes into it,” explained Mike Peters, vice president, IT, RIMS — who also conducts stress testing through his firm Sentinel Cyber Defense Advisors.

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Unless companies have an ethical hacker or certified information security officer on board who can conduct sophisticated simulated attacks, Peters recommended they hire third-party experts to test their networks for weaknesses, remediate these issues and retest again for vulnerabilities that haven’t been patched or have newly appeared.

“You need to plan for every type of threat that’s out there,” he added.

Hogg agreed that bringing third parties in to conduct tests brings “fresh thinking, best practice and cross-pollination of learnings from testing plans across a multitude of industries and enterprises.”

“Collaboration is key — you have to take silos down and work in a cross-functional manner.” — Jason J. Hogg, CEO, Aon Cyber Solutions

Legassick added that companies should test their plans at least annually, updating procedures whenever there is a significant change in business activity, technology or location.

“As companies expand, cyber security is not always front of mind, but new operations and territories all expose a company to new risks.”

For smaller companies that might not have the resources or the expertise to develop an internal cyber response plan from whole cloth, some carriers offer their own cyber risk resources online.

Evan Fenaroli, an underwriting product manager with the Philadelphia Insurance Companies (PHLY), said his company hosts an eRiskHub, which gives PHLY clients a place to start looking for cyber event response answers.

That includes access to a pool of attorneys who can guide company executives in creating a plan.

“It’s something at the highest level that needs to be a priority,” Fenaroli said. For those just getting started, Fenaroli provided a checklist for consideration:

  • Purchase cyber insurance, read the policy and understand its notice requirements.
  • Work with an attorney to develop a cyber event response plan that you can customize to your business.
  • Identify stakeholders within the company who will own the plan and its execution.
  • Find outside forensics experts that the company can call in an emergency.
  • Identify a public relations expert who can be called in the case of an event that could be leaked to the press or otherwise become newsworthy.

“When all of these things fall into place, the outcome is far better in that there isn’t a panic,” said Fenaroli, who, like others, recommends the plan be tested at least annually.

Cyber’s Physical Threat

With the digital and physical worlds converging due to the rise of the Internet of Things, Hogg reminded companies: “You can’t just test in the virtual world — testing physical end-point security is critical too.”

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How that testing is communicated to underwriters should also be a key focus, said Rich DePiero, head of cyber, North America, Swiss Re Corporate Solutions.

Don’t just report on what went well; it’s far more believable for an underwriter to hear what didn’t go well, he said.

“If I hear a client say it is perfect and then I look at some of the results of the responses to breaches last year, there is a disconnect. Help us understand what you learned and what you worked out. You want things to fail during these incident response tests, because that is how we learn,” he explained.

“Bringing in these outside firms, detailing what they learned and defining roles and responsibilities in the event of an incident is really the best practice, and we are seeing more and more companies do that.”

Support from the Board

Good cyber protection is built around a combination of process, technology, learning and people. While not every cyber incident needs to be reported to the boardroom, senior management has a key role in creating a culture of planning and risk awareness.

David Legassick, head of life sciences, tech and cyber, CNA Hardy

“Cyber is a boardroom risk. If it is not taken seriously at boardroom level, you are more than likely to suffer a network breach,” Legassick said.

However, getting board buy-in or buy-in from the C-suite is not always easy.

“C-suite executives often put off testing crisis plans as they get in the way of the day job. The irony here is obvious given how disruptive an incident can be,” said Sanchez.

“The C-suite must demonstrate its support for incident response planning and that it expects staff at all levels of the organization to play their part in recovering from serious incidents.”

“What these people need from the board is support,” said Jill Salmon, New York-based vice president, head of cyber/tech/MPL, Berkshire Hathaway Specialty Insurance.

“I don’t know that the information security folks are looking for direction from the board as much as they are looking for support from a resources standpoint and a visibility standpoint.

“They’ve got to be aware of what they need and they need to have the money to be able to build it up to that level,” she said.

Without that support, according to Legassick, failure to empower and encourage the IT team to manage cyber threats holistically through integration with the rest of the organization, particularly risk managers, becomes a common mistake.

He also warned that “blame culture” can prevent staff from escalating problems to management in a timely manner.

Collaboration and Communication

Given that cyber incident response truly is a team effort, it is therefore essential that a culture of collaboration, preparation and practice is embedded from the top down.

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One of the biggest tripping points for companies — and an area that has done the most damage from a reputational perspective — is in how quickly and effectively the company communicates to the public in the aftermath of a cyber event.

Salmon said of all the cyber incident response plans she has seen, the companies that have impressed her most are those that have written mock press releases and rehearsed how they are going to respond to the media in the aftermath of an event.

“We have seen so many companies trip up in that regard,” she said. “There have been examples of companies taking too long and then not explaining why it took them so long. It’s like any other crisis — the way that you are communicating it to the public is really important.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected] Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]