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

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]