Measuring Hazards: Developing Loss Prevention Statistics

There are few industries in the world that can flow though an individual’s arteries like the business of insurance. The philosophies have been passed down for hundreds of years from generation to generation. But, as the world of risk transforms, modern day insurers need to prepare for a new approach to risk management.

“Thou shall be governed by the loss ratios,” has been carved in the industry’s stone directive for eons past. While this measurement is valid for reviewing past profit or loss, it has become a redundant measurement of current books of business, otherwise known as the “current portfolio”.

Our “inbred theories” on risk management are becoming pre-historic compared to other industries. With new innovations such as e-commerce, direct writing, and large phone center operations, the risk landscape is changing dramatically. The industry’s speed in developing business innovations is commendable, but insurers need to recognize that major deficiencies will surface in terms of high loss ratio. As such, our industry must be prepared to accept new risk changes, and evaluation, and adapt at a quicker pace. We as a group must adapt quickly to a measurement system of current portfolio that has a direct relationship to the resultant “loss ratio”. A “statistical system” has been developed to measure current portfolio based on entities that have a direct relationship to poor loss ratios, which enhances our current philosophies. These entities have been determined to be correctable, thus adding an invaluable tool as a direct method for reduction of loss ratios.

The direct causes of these losses are brought into existence by a common element, which are “hazards”. We have developed an identifiable measurement of “minor” and “major” hazards. This measurement provides statistics on current business in a recognizable industry format.

Loss prevention guidelines

The risk management sector of the industry must set consistent guidelines in the actual measurement of hazard. Imagine fingertip access to risk management via measurement of hazards through loss prevention statistics. The research of classification and measurement of hazards has over the last three years become a reality. The SpecTec software provides an offensive method with its loss prevention statistics. As this system becomes more accessible our reinsurance markets will also have an effective new assessment tool. The first phase of this development was an “electronic inspection” format for loss prevention personnel, underwriters and management. The hurdles regarding format were non-continuity and consistency of reports.

“Hazards” for the purpose of “loss prevention statistics” had to first be defined and categorized. Hazards exist in two basic forms, “detectable” and “undetectable”. The focus of the loss prevention statistics is on property, or the “detectable”. As such, there are four main classifications to the hazard categorizations in property classes:

Loss prevention attitude

Physical

Housekeeping

Neighborhood

We found expansion to these categories tended to dilute the pure loss prevention statistics. Many ask at this point, “what about the environmental element type hazards?” This factor will eventually be introduced.

Hazard categorization

Loss ratios as indicated previously are a measurement of “past profit” or loss and are therefore not a measurement of current business. Loss ratios are not the cause of losses, they are the result of hazards. There two categories of hazard, being:

Minor hazards. It is important to identify these “minor/moderate hazards”. These are existing hazards, which do not present an immediate loss problem and usually are correctable. These minor hazards can in quantity be re-classed as a “major hazard”.

Major hazards. Theses are the simplest of hazards to identify. If they are not corrected immediately there exists a probable loss. There is little time allowance for correction.

These hazards have for years been recognized by loss prevention officers. However, the industry has lacked standardization until now. With a focus on identifying the hazard, management and underwriting departments now have an immediate risk management tool for analysis of current business.