Actuarial Data Is The Key To Securing Funds For Safety Programs
In today’s difficult and challenging economic environment, risk managers (RMs) find themselves under continuous pressure to pursue opportunities to reduce the cost of risk and minimize balance sheet volatility for their respective companies.
For many risk managers this means finding opportunities to address their most significant cost drivers: workers’ compensation and general liability.
To reduce/mitigate such cost drivers, RMs can implement a variety of safety initiatives. The challenge for RMs, however, is to secure the appropriate funding required for such initiatives in a climate where competition for such investments is fierce.
It is equally as challenging to show an immediate impact from a cost/benefit perspective for such an investment, since returns on safety initiatives may require 36 months or more to mature.
What are some of the possibilities, therefore, that a RM may want to explore, so as to “level the playing field” in securing funding for safety initiatives in such an environment?
Safety initiatives are one of the most powerful ways RMs can reduce their cost of risk.
In planning such an initiative, it may be prudent to consider targeting a “test site(s)” for a six-month period that has experienced both frequency and severity.
The site(s) selected should also consist of employees who are more readily adaptable to accept and adjust to changes in protocols and processes.
The limited time frame associated with this approach will also significantly reduce the amount of “upfront” funding required and may facilitate approval.
At the same time, the protocols for the “test site(s)” are being developed; the RM should engage actuarial support.
The RM’s actuary will have a solid understanding of the company’s claims practices and loss history, as well as the company’s overall operations and commitment to safety. It is essential the RM should fully brief the actuary on the proposed plan and secure validation, from the actuary, on what particular location(s) may be best suited for a “test site.”
Once agreed upon, the RM and the actuary must agree on an approach that incorporates the potential to extrapolate results — once the trial period has ended — to all the operating locations.
The capability to extrapolate and validate results to all locations is a compelling reason for actuarial engagement in the plan design and monitoring of the safety initiative.
If such an extrapolation proves feasible, the RM will be well-positioned to present a cogent plan to management for fully funding the safety initiative. The sign off from the actuary is essential since the resulting benefits (reduced premiums and lower IBNR) will need to pass the scrutiny of internal and external audits, and the company will want to immediately recognize these financial benefits.
Safety initiatives are one of the most powerful ways RMs can reduce their cost of risk. While there is general agreement on this point, securing funding for such initiatives is most challenging.
RMs afford themselves the best opportunity to secure funding for such initiatives when they can produce hard qualitative and quantitative data that effectively competes for scarce corporate capital. In this regard, actuaries are essential partners.