It has been said that unless you understand history, you will repeat it. That proves true with loss experience. Lack of understanding and addressing trends mean they continue. Good risk management can stop this cycle and reduce your losses.
Loss Ratio
The most basic analysis is the loss ratio. This is the ratio between the incurred losses by the insurance carrier and the premium you pay for that coverage. Incurred losses include paid dollars, expenses and any reserves that are assigned to that claim. If your incurred losses are $50,000 and the premium for that line of business is $75,000, you would have a 66% loss ratio. As a rule of thumb, for standard market business, loss ratios over 55% are borderline unprofitable for the insurance company.
Frequency / Severity
The second level of loss analysis assigns a loss cause or loss type to each claim. By sorting on this factor you can calculate the frequency of losses. How many of each loss type as a percentage of the total losses You can also calculate severity, the percentage of loss dollars associated with each loss type or cause. This will identify the loss types that occur most often and the most expensive loss types. The most frequent event is not always the severity driver.
One truism in the insurance world is that frequency leads to severity. My analogy is playing the slots. You keep pulling then handle for small returns or losses hoping to hit it big. Numerous small losses may lead up to a very expensive event.
Secondary Factors
Once you have this first layer of data in hand you can enhance your efforts by using secondary factors that would allow greater drilling down. Some good secondary analysis points may include:
Location if you have multiple locations
Time of day
Day of the week
Department if applicable
Body part, arm, leg, wrist, back, etc.
Accident site – limited access highway, major street, residential area, parking lot
Other useful calculations can be ratios based on the following data points:
Hours worked / number of employees
Revenue or sales
Miles driven
Units sold for product liability
Benchmarking
Another level of loss analysis can be benchmarking your results against known standards. One common loss benchmarking is using your OSHA 300 data to calculate an accident incident rate for total cases and lost time cases. There is an online tool, https://data.bls.gov/iirc/, to compare your data to national averages.
Other sources of benchmarking data can be National Safety Council Accident Facts, DOT crash data, Consumer Product Safety investigations and industry group publications.
We used Consumer Product Safety playground accident frequency data to compare playground injuries at a client’s facilities to the national average. We had recommended playground safety surface improvements, and the current accident frequency was similar to the incident rate that prompted the CPSC playground guidelines. Loss analysis supported the recommendation to improve the safety surfaces.
Data outside insurance loss runs
Understanding the structure of the insurance program can influence the source of your loss data. If there is a large deductible or Self-Insured Retention for a given line of business, you need to find the data for events that are not included in insurance company loss runs.
Look for accounting ledgers for uninsured losses, warranty payments, courtesy payments. For non-monetary events look for incident reports, customer complaints or exception reports from processes. These “near miss” events can be trended to identify potential loss causes that have not appeared on the insurance records.
Available tools
All of this can be accomplished within Excel. Using the graphing functions will allow display of the data for visual management systems.
Follow up
You can examine controls that would affect the frequency or severity drivers. Knowing the current frequency and severity data will allow you to repeat the loss analysis at a later date to assess if the implementation of the controls is effective.
The Driehaus Difference
We recognize the impact of effective loss analysis on improving your business results. We use this data to highlight your initiative-taking efforts to potential insurance carriers to help secure the best possible terms for your insurance program. We help you get started on this process and help you with managing the information to leverage control improvements. Realizing the goal of accident reduction will often translate into premium savings or program enhancement. We want to be your insurance provider and risk management consultant. Call us at 513-977-6860 or contact us on the internet at www.driehausins.com
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