True confession time: we’re a bunch of nerds here at WorkCompEdge.com, Specific Software Solutions, and SIGMA Actuarial Consulting Group. And, as CEO, I suppose there's a little pressure on me to be the nerdiest of us all.
"...moving your company toward the minimum mod rivals rocket science..."
That's not a bad assignment! I like numbers, and I’ve had the opportunity to use my mathematical education in various analytical disciplines - on everything from top secret “star wars” modeling of ballistic defense systems to complex financial models in the automotive finance industry. I’ve seen math applied to support decision making in many industries and situations – often resulting in decisions that were excellent but far from intuitive.
- know your total cost of risk, and
- have a goal - not to buy the cheapest coverage you can find, but to engage with a business partner who will help you change your company processes to move your company to the minimum mod and the minimum premium.
This is important not only for the long term costs savings but for the many ways in which your business will improve as a result.
Within WorkCompEdge we have derived our own unique expression of the total cost of risk as follows:
The WorkCompEdge TCORW = (LR + PM + PC + PA + R + S + C + F) + (LI * 2.5)
In this formula, the direct costs include:
LR = Retained losses
PM = Minimum insurance premium
PC = Controllable insurance premiums due to the controllable mod
PA = Estimated premium adjustments
R = Risk administration allocated to workers compensation
S = Outside services related to workers compensation
C = Collateral requirements (applicable for deductible programs) related to workers compensation
F = Fees and taxes related to workers compensation
This formula also includes indirect costs of workers compensation, which have been estimated by a variety of institutions, including OSHA, to be anywhere from 1 to 20 times the cost of a loss. Some formulas for the total cost of risk exclude indirect costs because of the inherent difficulty in determining an accurate value. For the WorkCompEdge total cost of risk value, our actuarial group, SIGMA Actuarial Consulting Group, analyzed available data across a broad spectrum of industries to determine an estimate of indirect costs. This estimate is simply:
Indirect Costs = 2.5 * LI
where LI = The total incurred loss amount for the period analyzed
In many cases, this formula will underestimate the indirect costs. However, here at WorkCompEdge, we decided that some measure of the indirect costs of workers compensation losses is a critical portion of the overall equation.
The purpose of knowing your total cost of risk is to see the long term impact on this number in different scenarios. The goal is to minimize this number. Buying the cheapest insurance is not likely to result in reaching your minimum total cost of risk. Working with an agent and insurance company that supports your effort to implement WorkCompEdge-type strategies will launch your company (pun intended!) toward minimizing your total cost of risk over the long term.
If you’re a WorkCompEdge member, be sure to look at our Avoid low bid mentality module for more about this topic, including a handy-dandy workbook to help you calculate and play what-if scenarios with your total cost of risk.
http://www.WorkCompEdge.com
http://www.SpecificSoftware.com
