The Caveats of Qualitative Benchmarking
Risk managers find themselves continuously challenged by senior management to develop meaningful and relevant benchmarking data to determine how well their insurance-related cost of risk compares to that of their peers.
The key words here are “meaningful” and “relevant”. Risk managers are well aware of the inherent difficulties of securing such data from their peers.
Compiling a lot of insurance industry- related data doesn’t assure that we will get an apples to apples comparison. Regardless of the data source, whether it be peer-related or insurance industry-related, risk managers must be focused on aligning the data to their respective company and its operations.
…a risk manager must be cognizant of the key considerations in any benchmarking exercise to arrive at a “meaningful and relevant ” conclusion before presenting that conclusion to senior management.
I have outlined below some of the key questions which need to be considered to get the right alignment.
• What drives your insurance costs, retained losses or commercial premiums?
• Regardless of whether your company operates regionally or nationally – for as we know workers’ compensation, general liabilities and auto liability laws and regulations vary by state – comparisons should be broken down regionally versus nationally. Comparing performance in the Northeast to the Midwest is probably not relevant.
• Is your workforce comprised of union and/or non-union employees? Costs for workers’ compensation may vary considerably and comparisons should be union to union and non-union to non-union.
• In regards to retained losses, is your actuarial forecast of ultimate losses conservative? Do you reserve at or above the midpoint of the actuarial forecast? Does your forecast include a risk margin?
• Are safety, loss control and claims management initiatives receiving credit for impacting ultimate retained losses?
• Are retained losses under your supervision as opposed to outside of your purview?
• Is your company actively engaged in mergers and acquisitions?
• What is the primary focus of your business?
• Does your company actively utilize a captive insurance company?
While the above considerations can be applied to benchmarking both commercial premiums and retained losses, it’s essential to understand that risk managers in most instances will have much less control over commercial premiums.
Such premiums are often driven by less predictable and unforeseen global events such as natural disasters and class-action lawsuits, to cite a few. As such, a risk manager must be prudent to not assume too much credit for premium decreases in a “soft” market so as not to assume inappropriate blame in a “hard” market.
On the other hand, a risk manager generally has greater control over retained losses such as workers’ compensation, general liability and auto liability.
From an actuarial perspective, such losses lend themselves to more predictability. A risk manager, through a variety of aggressive loss control, safety and claims management programs and practices may be able to positively influence and mitigate such costs.
As indicated at the outset, a risk manager must be cognizant of the key considerations in any benchmarking exercise to arrive at a “meaningful and relevant ” conclusion before presenting that conclusion to senior management.
Given the uncertainty and limitations on the kinds of peer group data a risk manager would need to perform a truly “apples to apples” comparison, the most “relevant and meaningful” data may be that which a risk manager already possesses: His own.