Ten Hidden Costs of Substandard Risk Management (PART 1)
By Gary Pearce
Feb 23, 2023
Do you know whether your risk management program is truly optimized? Differently put, are you confident that all current activities are either necessary or offer an attractive return? Can you be sure that you aren’t failing to deploy any initiatives that present a favorable risk/return profile?
There may not always be an easy way to know that things could have been better. Part of the problem is the tendency to too-narrowly define and recognize the total cost of risk. To help gain a broader understanding, we present ten hidden costs of substandard risk management, split across two articles, starting with the five below.
Cost #1: Excessive claim volume
Although it’s evident that increased claim volume eventually leads to greater insurance costs and other expenses, it can be difficult to know when claim volume is beyond what’s reasonably achievable. Workers’ compensation experience modification factors, or injury and illness rates calculated from OSHA data, give some indication.
Companies can always use their own past rates as a basis for comparison, and sometimes brokers or trade groups publish benchmarking data that provide additional reference points. However, while these methods have some utility, they are nonetheless limited. A complementary approach is to accumulate root cause data on recent claims, and assess what precautions might have prevented certain accidents from occurring.
This method is advantageous because unlike the aforementioned numeric comparisons, it leads the company down a path to improvement. Note, however, that knowledge of accident causation probably won’t be beneficial unless it is coupled with a workable plan of how to break the causation chain.
Cost #2: Excessive cost per claim
Are your claims being closed for favorable amounts? How does one even determine this?
Depending on the particulars, there may be good comparative data available from industry sources. Certain insurers and law firms publish analyses of large verdicts and settlements for certain types of litigation or insurance coverages.
More recently, some large workers’ compensation carriers and service providers have analyzed their books of claims and established statistical profiles of cases, taking into account factors such as jurisdiction and specifics of injuries suffered. They use the results to guide their own evaluations and for selective sharing with clients. It’s worth asking your providers what their capabilities might be.
When evaluating case closure values, beware of two phenomena: first, the self-interest tendency for involved parties to characterize most closures as favorable; second, the risk of mistaking statistical randomness for true underlying trends.
Cost #3: Processing inefficiencies and errors
It’s easy to under-recognize how much time must be spent in reporting, administering, and monitoring claims and incidents. Usually multiple persons are involved, including the internal claim administrator and other stakeholders such as safety staff, human resources, witnesses, and operational supervisors. The sphere of involvement becomes even greater when cases go to litigation or are significant enough to engage multiple layers of management.
The need to draw from multiple data sources tends to be similarly under-recognized. Claim adjusters typically need information from systems such as payroll, HR information, and time and attendance records. Depending on the nature of the case, information concerning customer interactions, equipment maintenance, facility conditions, security reports, and more may also be necessary.
Two notable problems thereby arise. First, the time of each involved party accumulates to a substantial and under-recognized administration expense. Second, whenever information is manually extracted from one system and put into another, there is high potential for transcription errors and other mistakes. These errors slow things down and damage the ability to cost-effectively resolve claims.
This processing burden presents a tremendous opportunity for efficiency and accuracy gains that reduce overhead costs, free up staff for higher-value activity, and facilitate better case outcomes. This is accomplished by replacing manual steps with workflow tools that are infused with the expertise of practitioners skilled in both interconnected technology and best claim practices.
Cost #4: Limited visibility into true cost drivers
Even midsize organizations have complex networks of divisions, subsidiaries and physical locations. Add to this a lengthy roster of job descriptions, differing location characteristics, and ever-changing leadership hierarchies and product lines, and it becomes quickly apparent that there are too many potential analytical combinations and dimensions to fully understand and analyze. Consequently, the disproportionate contributors to corporate loss experience might never be uncovered. And, the extensive effort needed to set up some dynamic views may quickly be for naught once a different viewpoint is called for.
Too many companies forego the deep dive into root causes simply because it involves too much time and expertise. Clearly, a better way is needed. State of the art risk management information solutions are the way out of this predicament.
The right risk management analytical engine can empower the end user to drill up or down, change combinations of factors, test different date ranges, or otherwise perform “on the fly” analytics with virtually instant results. Moreover, this can be done by people who lack any knowledge of pivot tables or similar esoterica.
With this newfound power, it becomes practical for even the novice user to go beyond mere symptoms to uncover true cost drivers and the things that matter most. As an added bonus, the same systems produce attractive reports and charts that are visually appealing and convey clear messages to decision-makers.
Cost #5: Non-integrated technologies
Many organizations effectively have a two-layered technology stack: first, a collection of enterprise-wide tools for functions such as accounting, payables, and customer service; then, second, a spectrum of limited-purpose tools that are selected and utilized by specific departments or business units to address their particular needs. The risk management information system (RMIS) typically falls in the latter category.
One consequence of this dichotomy is that even if a central IT department participates in the selection and hosting of the RMIS, it is nonetheless addressed as a standalone system. The opportunity to better integrate with existing systems, whether external or internal, was probably not a criterion in the original selection decision and may not be an operational priority. Even when opportunities to knock down silos are recognized, they tend to be crowded out by higher priorities.
This is another missed opportunity. The best RMIS deployments are well-integrated with other key technologies within the organization to ensure speed, efficiency and accuracy in processing. For example, integrations with payroll systems allow wage data to be automatically populated on workers' compensation claim reports and further fed into state-mandated first notice of claim reports. Similar opportunities exist in areas such as nurse case management, construction management, carrier claim intake, carrier loss run ingestion, and OSHA log preparation.
Customers utilizing such integrations realize many hours of time efficiencies on every reported claim.
Concluding Thoughts (Part 1)
While these five hidden risk management costs are serious drivers for inefficiency and waste, they also present an opportunity to implement powerful organizational and technological improvements to ensure better outcomes and a stronger risk profile.