PEO Risk Management Advisor 5/2011


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PEO Risk Management Advisor 5/2011

  1. 1. PEO ADVISOR RISK MANAGEMENT © Praxiom Risk Management May 2011FeaturesTop 10 Methods for Identifying Business Risks- John Keller, CRM ARM CIC AAIIt’s cliché, but risk is everywhere. If you ask a business executive to answer “what is your biggest risk,” you may get 100 differentanswers from 100 different people. The worst answer is no answer at all; just a blank stare. The reason is the word “risk” is usedtoo freely and can be defined in too many different ways to be interchangeable in all industries. So, let’s put some definitionaround it and narrow it down for a business context. All executives can do this by asking themselves some simple questions thatwill slowly start to identify the biggest threats to the business. Only after a risk has been defined will the 10 best methods for iden-tifying that risk be useful.What’s a Risk?In its simplest form, a risk is a chance of a loss, an uncertainty of loss, a possibility of various outcomes, or the difference betweensomething that is expected versus what actually happens.What’s at Risk?We can classify a risk in several ways, and depending on the industry, the biggest risk to a business lies somewhere in these classifi-cations: Property – tangible or intangible Human Resources – employees, contractors, suppliers/vendors, and other business relationships in general Ask the Advisor… Liability – Liability risk can be strict liability or negligence coming from tort, The latest question we’ve been asked is: contracts, or statutory law, but the most prominent characteristic of a li- ability risk is that it cannot be accurately measured ahead of time. What is an NCCI form ERM-6 and why is it important Net Income – Net Income is a bottom line number that would contemplate for a PEO to be familiar with it’s procedure? fluctuations in human capital, financial markets, governmental regulations, They Answer? or customers. The ERM-6 is an NCCI form that facilitates the submis-Continue reading for details on the top 10 identification methods... sion of historical payroll and claims data which will be used to help promulgate an experience modification rate (EMR) for a company. The data is obtained andEthics in Risk Management submitted by “non affiliates” of the NCCI.- David E. Carothers CSP ARM Common entities that submit ERM-6 information forAt the beginning of this century we witnessed huge ethical blunders on many the promulgation of an EMR are entities that havelevels—both business and personal. Ethical decision making (or the decision to been self-insured, utilized a TPA, or have had theirignore ethics) has contributed to events such as the implosion of large corpora- historical information combined with that of a PEO.tions during a robust economy, and to the collapse of weaker firms as the econ- When an company leaves a PEO, they may requestomy turned sour. To be sure, other factors were involved in almost every case, historical payroll and loss data in order to completebut ethics remained at the heart of the problem. the ERM-6 and have their own EMR promulgated.Defined most simply, ethics is “a system of moral principles.” There are various Download the ERM-6 from NCCIfields of ethics and several iterations of ethics (depending on particular histori-cal eras), but at the end of the day, ethics is still a moral issue, and oftentimes If you have a question you’d like answered, email the editor at:decisions are required to be made at a personal level. businesses are built on solid ethical foundations. However, temptationsremain. In a strong economy the temptation may be to ignore ethical consid-erations to maximize profits. In a weak economy, the temptation may be toignore sound ethical practices simply to survive. Continue reading... © 2011 P rax iom Risk Management LLC www.prax iom-rm. com Prax iom Risk Management is a Certified Risk Management and Safety P rofessional firm. 05/11
  2. 2. PEO RISK MANAGEMENT ADVISOR © Praxiom Risk ManagementMeasuring PEO Performance Evaluate your PEO’s practices vs CI certification guidelines...This section is dedicated to those PEOs that manage their WorkersCompensation program through a Large Deductible or captive As we review the CI’s best practices for PEO risk management in eacharrangement, and utilize positive results as a profit center. Each of their 5 categories, evaluate how your PEO stacks up by answeringmonth we highlight different performance metrics that should be these questions:used to better understand a PEOs WC frequency, severity, and Basic Organizational Requirementsprofitability performance.The Recordable Ratio Full Service – Is the PEO contractually assuming the right to pay wages and taxes? Is this service being performed? Is payroll and taxThe Recordable Ratio is a metric used by OSHA and the Bureau of administration promised in sales and proposal materials? Does theLabor and Statistics. It is the ratio of (# of OSHA recordable inci- CSA have wording which gives the PEO direction and control of work-dents / 200,000 hours), where 200,000 hours represents the aver- site employees? Does the CSA state the PEO will proved WC cover-age number of hours worked by 100 employees in a year. age, safety policies, and on-site risk control? Are these services beingThis ratio is another way of measuring frequency, but since all delivered?recordable incidents do not develop into workers compensation Written Business Plan – Does the business plan describe key serviceclaims, it can be though of as a claim indicator. offerings and provide details of how they will be delivered? Does theWhile it has always been our professional recommendation for business plan identify target geographic markets and client types? IsPEOs NOT to sign off on client OSHA logs, but if a PEO receives or there an “Ideal Client Profile” defined with SIC codes, WC codes ortracks the OSHA logs for it’s clients, the analysis and aggregation of other types of coding? Is there a detailed sales and marketing strat- egy that includes marketing techniques, target demographic andthe OSHA log statistics can be used for tracking and benchmarking growth projections? Are client retention goals defined?purposes.The Bureau of Labor and Statistics provides historical ratios, by Organizational Structure/Staffing - Is there a clear separation be-industry, for the use of the general public. You can access and tween sales and risk assessment decisions? Do job descriptions de-query their database at their website: fine education and qualification requirements for staff? Are there defined qualification requirements for contract ser- vice providers? Basic Record Retention – Is client information, un-Workers Compensation Highlights derwriting data, and historical loss information re- tained for on demand retrieval? Can key PEO manag-Grabbing Hold of the TailBy Bill Zachry ers access and provide records upon request from the WC carrierIn workers comp insurance, a tail is the length of time it takes to within 24 hours?completely close all the claims and exposure from a particular acci- Employee Handbook – Does the employee handbook documentdent year. shared responsibility for hiring, discipline and termination? Is aIt is my theory that the settlement philosophy that is currently signed receipt required from each worksite employee and kept in thebeing used by many of claims administrators is a major underlying client file?reason that workers compensation has a long and expensive tail.When I was a baby claims examiner, I was taken into the back Controllable Business Structure - Is there confirmation that there areroom, was given the secret examiner handshake and was also told no wages listed in state that are not on the client list? Any evidencethe following: that would indicate “piggybacking?”"If the employee is still working at the insured, and if the insured isstill on risk, then stipulate to provide partial disability and lifetime For more on CI requirements visit: www.certificationinstitute.orgfuture medical care. If the employee is no longer working at theinsured, or if the insured is no longer on risk, then C&R the claim."Continue reading... © 2011 P rax iom Risk Management LLC www.prax iom-rm. com Prax iom Risk Management is a Certified Risk Management and Safety P rofessional firm. 05/11
  3. 3. PEO RISK MANAGEMENT ADVISOR © Praxiom Risk ManagementBenchmarkingThe Benchmarking section is used to outline various industries in terms of their Workers Compensation risk factors, historical claims statistics, andkey loss sources. Benchmarking statistics are obtained from a variety of credible sources including the largest WC insurance companies in the U.S.and The Bureau of Labor and Statistics. The statistics used are aggregated from all states and averaged over a 5 year rolling period. All stats be-low are from claims incurred between 1/1/06—12/31/10.Rate Definitions:Frequency Rate = # non $0 claims / payroll per $1M Recordable = # OSHA recordable incidents / 200,000 hours1Loss Rate = Total Incurred $ / payroll per $100 DART = incidents w/ Days Away, Restricted duty or job Transfer / 200,000 hours1This month we continue our look at professional services with a review of Auto Body Repair Services. 7532 - Auto Body Loss Sources Average Inc. % Inc % Claims Industry SIC:Repair Slip/Fall - Same Level $ 24,002 42.3% 9.9% As of:1/31/2011 Material Handling $ 9,787 40.0% 22.5% Period:1/1/06 - 12/31/2010 Struck By/Against $ 1,279 8.4% 36.8% Average Incurred $5,601 Slip/Fall - Elevated $ 6,481 4.1% 3.6% Average Paid $4,861 Hand Tool $ 1,386 2.8% 11.5% % claims > $10,000 7.9% All Other 2.4% 15.8% % Incurred >$10,000 84.6% SIC 7532 - Top 5 Loss Sources % Total Incurred % claims >$25,000 4.7% Slip/Fall - Hand Tool All Other Elevated 3% % Incurred >$25,000 75.9% Struck By 4% 2% NAIC 811100 9% Slip/Fall - Key Metrics - SIC 75xx BLS Stat 2006 2007 2008 2009 Same Level 42% Frequency Rate 1.57 Recordable 3.1 3.9 3.8 3.7 Material Handling Loss Rate $0.65 DART 1.4 1.8 1.9 1.8 40%Over the past six months Avg Incurred % Claims > % Incurred Frequencywe have reviewed bench- SIC—Description Avg Paid Loss Rate per Claim $10,000 >$10,000 Ratemarking statistics for sev- 6411 - Insurance Agencies $ 9,003 $ 5,813 11.5% 91.1% 0.26 $ 0.20eral common professional 6531 - Real Estate Agencies $ 7,116 $ 5,401 10.5% 88.5% 1.20 $ 0.59service industries. 7349 - Building Maintenance $ 7,356 $ 5,566 12.7% 87.4% 0.90 $ 0.64This table is a summary of 7363 - PEOs $ 5,343 $ 3,400 8.4% 89.6% 0.90 $ 0.64those metrics. We encour- 7532 - Auto Body Repair $ 5,601 $ 4,861 7.9% 84.6% 1.57 $ 0.65age PEOs to analyze their 7538 - General Auto Repair $ 6,639 $ 5,363 8.2% 86.9% 1.57 $ 0.65own book of business, by 8011 - Physicians Offices $ 3,475 $ 2,733 4.8% 96.3% 0.92 $ 0.30industry, to better under- 8051 - Skilled Nursing $ 4,250 $ 3,409 9.5% 84.7% 0.92 $ 0.30stand their exposures, loss 8111 - Legal Services $ 7,262 $ 5,275 11.8% 90.6% 0.07 $ 0.03trends and to make effi- 8711 - Engineering $ 7,497 $ 6,246 11.9% 90.2% 0.67 $ 0.69 8712 - Architecture $ 2,951 $ 2,875 5.1% 83.0% 0.21 $ 0.40cient use of your risk con- 8721 - Accounting $ 8,985 $ 7,044 10.3% 92.0% 0.21 $ 0.40trol resources.1—200,000 hours represents the amount of time worked by 100 WSE in one year © 2011 P rax iom Risk Management LLC www.prax iom-rm. com Prax iom Risk Management is a Certified Risk Management and Safety P rofessional firm. 05/11
  4. 4. PEO RISK MANAGEMENT ADVISOR © Praxiom Risk Management Stay Connected... If you haven’t already joined, there is now a group on LinkedIn dedicated to PEO Risk Management. All PEO Executives and Risk Managers are encouraged to join and participate in the online discussions. Or, you can simply follow the news posts that relate to PEO, Risk Management, and Workers Compensation. Click here to go to the PEO Risk Management group on LinkedIn and join.With PEO Risk Management professionals averaging 20 years of experience and encompassing abroad range of industry expertise, Praxiom Risk Management is committed to providing a widerange of resources to help PEOs mitigate risk and grow their Workers Compensation profit center.This PEO RM Advisor is a monthly e-newsletter designed to keep PEO executives and Risk Manage-ment professionals informed of relevant topics in the area of PEO risk management. Sharing infor-mation and best practice through e-newsletters is one of the many ways we help support PEO or-ganizations risk management efforts.If you would like to contribute industry specific content or articles for publication in the areas be-low, you may submit them to the Editor at: Loss Control Claims Management Performance Metrics RM Information Systems Policy Administration Carrier Relationships Industry Certifications Up Next… We’ll continue with our performance benchmarking of service com- panies with a look into the WC results of: 7011—Hotels 6512—Non Residential Building Operators © 2011 P rax iom Risk Management LLC www.prax iom-rm. com Prax iom Risk Management is a Certified Risk Management and Safety P rofessional firm. 05/11