Through the Looking Glass

In today’s demanding environment of stringent compliance requirements and reputational risk exposure, senior management might call upon risk managers at any time to provide loss statistics. This information must be correct because the executives will rely upon it to make business decisions that will ultimately affect financial outcomes.

“Risk managers have a fiduciary responsibility to ensure that data tracked is accurate because reserves for uninsured portions of claims must be carried on financial statements and therefore will impact financial liability,” says Kevin McMullen, risk manager of the Hudson’s Bay Company. “Reserving practices are important and must be accurate in all ways due to the impact on financial reporting.”

The data reported will usually reflect frequency, severity and financial exposure. Not only will this information provide visibility about what’s going on within the organization’s operations, but it will also keep senior management abreast of any issues that could involve harm to the organization’s reputation.

It’s crucial for risk managers to know and understand their data, according to Mullen.

“Risk managers need to have the ability to confirm that data is correct,” he says. “In most cases, your loss data will not match the insurers’ 100% of the time, and risk managers need to be able to explain the difference.”

When a risk manager is confident his department has developed a thorough process for collecting accurate and reliable loss information — to the point that he would not hesitate to provide a requested analysis promptly — he not only illustrates the worth of the risk management role, but also establishes the organization as a leader in its field.

TRACKING INCIDENTS

While the insurer may track claims that fall within the policy, it’s important to monitor any incidents not being handled by the insurer as well. For example, if a retail operation settles a minor slip-and-fall accident with a store gift certificate, how is that situation tracked? Are those types of occurrences getting back to the risk management division, or are the costs being assumed as an operational expense, with no record of the incident or payment?

Without proper tracking, there’s no opportunity to employ risk control measures to address the issue that led to the accident. While there may have been a small payout in this example, a more serious and costly incident could occur in the future as a result of the same cause. The goal is to catch trends before they turn into expensive claims.

Gone are the days of completing a hard copy incident report, putting it in a file and hoping that it can be found if needed in the future. Every incident should be captured in an electronic format and saved in case the issue is raised in the future or a statement of claim is received. Ideally, key reporting variables should be gathered up front.

CAPTURING DATA

When analyzing claims data, it’s necessary to include information from all sources — independent adjusters, insurers, internal resources and captives. Data from incidents and claims handled internally will need to be included for a full analysis.

Information should be organized in a meaningful way so that it can be used for risk control purposes in the future.

However, pulling this data together can be a challenge. All of the information will need to be brought together into a similar, consistent format, ideally gross of the deductible and over and above the self-insured retention.

If claims are tracked by location, region or division, the same format should be used for all categories. This will help when looking at the losses for a particular location or division and may be necessary for the allocation of costs and/or deductibles down the road. All incidents should be included in the risk analysis for that category. Monitoring all payouts will be relevant to carrying out a full assessment of loss exposures when considering changes to deductibles and self-insured retentions.

Preferably, claims data should be tracked in one system. Several risk management information systems are available that provide a variety of features in addition to claims data tracking and risk control features. Many third-party administrators (independent adjusters) and insurers also provide such services.

If you are transferring data from your insurer to your third-party administrator, broker or risk management information systems provider, it’s necessary to confirm the expectations of the data transfer processes from the insurer.

Will the insurer transfer the claims data directly to a service-provider? What will the format of the data transfer be? How often will the transfer take place? Will the insurer allow direct contact from the service-provider to obtain the data? What data will be released? What happens after a file goes into litigation? Is that data obtained any differently?

“Insurers are seeing a growing emphasis on the availability and reliability of claims data,” says Vejai Manbahal, claim service manager of Zurich Canada. “There is an increased involvement of the insured in the claims process from a risk management perspective. They are looking to insurers for more sophisticated insurance products and services.”

If there is a requirement under the policy, claims must be reported to the insurer from dollar one, even if the loss is within a self-insured retention.

In today’s highly regulated business environment, the insurer may be required to report claim criteria to a regulator. Confirm with your insurer what those requirements are and which source will provide the data to the regulator.

Transferring data automatically through technology will decrease the potential for human error. If the transfer cannot be done automatically, then an established workflow is required in order to obtain consistent and accurate data.

The process for collecting the data should include breaking out the data by policy terms, in addition to line of coverage.

Accuracy related to the policy term is imperative in the event that coverage is changed from an occurrence to claims made basis in the future. Data should be collected and entered on a timely basis, so that information is up to date. Ideally, claims information and data should be available in real time and accessible via the Web in order that the risk manager can obtain the data when working off site.

If a service provider is tracking the data, it’s important to have a service agreement in place outlining any expectations of the data to be tracked and the service levels that are expected, such as:

• a timeline for entering claims and incidents in the system;

• custom fields of information to be collected;

• availability of data (real time?);

• number of users that would have access to the data; and

• PIPEDA access requirements, etc. The contract should specify who owns

the data and conditions of termination should the arrangement be discontinued. The agreement should also spell out any fees related to transferring of data to another format, customization programming and on-going pricing in the event that the provider will be tracking data for the life of the file.

ANALYZING THE DATA

The data is valuable only if it can be pulled into a report format that is usable. What format is suitable for your purposes? Do you need reports with coloured pie charts to present to the board of directors or senior management? Do you prefer to pull all data into an Excel format so that the data can be manipulated in a required format?

Ideally, the tracking system will allow easy segregation of data over and the above the self-insured retention and/or any applicable aggregates. Does the system allow monitoring of performance measures related to claims handling? Is the time that the claims are open increasing or decreasing? Are claims or legal expenses rising or going down? Are the new risk and expense control mea sures that have been implemented actually affecting the claims costs and expenses?

Key performance indicators will allow you to manage your claims portfolio with the goal of reducing shelf life, which will result in lower claims costs.

If there’s a high frequency of claims, it’s important to track the types and causes of losses in order to implement risk control measures. Does the system allow the flexibility to add custom fields in order to track claim and industry trends? Can those fields then be pulled into a report that can be referred to operations to address the issues at hand? Even if the organization does not allocate costs back to individual divisions or operations, they should be aware of the exposures in their area.

Your broker can assist you in setting up the reporting requirements to ensure that the key variables are being collected. It’s imperative that the broker be included in the process because he or she will be looking to the data for marketing the program on renewal. Premium levels will be based on the claims data, so it will be necessary to make sure that the information is accurate and up-to-date.

Data will also be used for loss forecasting, which in turn will lead to assessing adequate retentions and deductibles. In an instance in which a self-insured retention is under consideration, analysis of data will be required to determine potential cost impacts of changes in the program structure. Because the retention costs will be real expenses to the bottom line, it is imperative that the forecasting uses accurate data to avoid surprises later.

———

Gone are the days of completing a hard copy incident report, putting it in a file and hoping that it can be found if needed in the future.

———

Key performance indicators will allow you to manage your claims portfolio with the goal of reducing shelf life, which will result in lower claims costs.