Benchmarking, an insurance industry buzzword, is used to gauge how a company is performing compared to its cohorts. Risk management professionals may choose to examine several benchmarking components for their property and casualty (P&C) insurance programs, including premiums, deductibles and limits, and loss experience. Comparable industry metrics are available from rating bureaus, third-party administrators (TPAs), insurance carriers, insurance brokers, and other industry research groups.
While these benchmarks can provide insight into how the components of your insurance program are performing, no two companies are perfectly alike. There may be disparities in firm size, risk tolerance, industry, geography, loss control and safety, and claim management, to name a few. These differences can make it tricky to successfully use benchmarks to help improve your operations or determine where you fall among similar companies. As you search for the appropriate benchmarking figures, you also need to ask the question: who is your peer?
This paper will address some common sources for workers’ compensation loss experience benchmarks, including rating bureaus and brokers, carriers, and TPAs, as well as how to overcome the challenge of finding a true peer.
Rating bureaus
For workers’ compensation, the prevalent rating bureau is the National Council of Compensation Insurance (NCCI). Some states also have independent rating bureaus, including California, Michigan, and New York. The purpose of these rating bureaus is to collect, compile, and analyze workers’ compensation loss data from their members. Because of the large volume of information, results can be compiled separately by state and job description (class code) while remaining credible. This helps both insurers and insureds understand the expected risk in more specific ways.
One set of statistics that bureaus provide are loss costs, which can help to serve as a benchmark for your losses. By applying your firm-specific payroll to these loss costs, you can calculate an estimate of average losses to compare to your actual experience. An industry-wide standard is to consider loss costs on a per $100 of payroll basis, for the sake of comparison.
Figure 1: Sample Loss Cost Analysis, Various States, Class Code 8810 (clerical)
Figure 1 displays various loss costs for the 8810 (clerical) class code for nine different states. In this subset of data, the range of losses is $0.07 to $0.21, per $100 of payroll. This range of loss costs demonstrates the differences among states, and the resulting estimated losses can help provide an indication of expected loss experience based on the states in which you operate.
Figure 2: Sample Loss Cost Analysis, Various States, Class Code 7219 (trucking)
Figure 2 compares the same states as Figure 1; however, this is for a riskier class code: 7219 (trucking). The loss costs are much higher than they were for 8810 and, once again, there is a wide range in this subset of data, between $3.59 and $9.99, per $100 of payroll. For a company that has a variety of class codes, the rating bureau loss costs will capture underlying differences in risk between these job classifications.
The total estimated losses can be used as a benchmark to actual losses. For example, if your company mirrored the states, class code, and payroll in Figure 2, you could compare the $507,100 in total estimated losses to your actual experience. While this exercise attempts to control for firm size, industry, and geography, it still may not provide a true peer benchmark. Additionally, it may result in a misleading comparison when evaluating losses that have not been developed to ultimate value, have not been adjusted for inflation, or are limited to a retention. It’s important to realize that some states publish rates, including premium, as opposed to loss costs. These rates will need to be adjusted to reflect the expected loss component, and some of the published loss costs will need to be tweaked to account for the treatment of loss adjustment expenses (LAE). Your actuary will be able to help make these modifications for comparison purposes to your specific loss basis.
Another source of industry benchmarking, which still doesn’t completely address the shortcoming in finding a true peer, may be found with your insurance-related partners.
Resources from brokers, carriers, or TPAs
Prior to the popular rise of data collection and storage, benchmarks were rudimentary, consisting primarily of comparing a company’s loss rate (retained losses per $100 of payroll) to individual peers or across a book of business.
Figure 3: Sample Rudimentary Benchmark Comparison
In Figure 3, Company ABC can see, generally, how it ranks among “peers” and an entire book of business. The peers may perform similar operations and are potentially in similar states, but there is not an explicit adjustment to the peer results to ensure an apples-to-apples comparison. Additionally, if Company ABC is primarily clerical and the book of business is heavily skewed by manufacturing operations, then Company ABC may jump to an incorrect conclusion that it is outperforming the book.
Nowadays, many TPAs, carriers, and brokers have the capability to tailor benchmarks to be a little more appropriate to the company of interest. At a basic level, they can filter large data sets to look at losses in the same state or class code. Some may have the capability to go even further and adjust for other claim characteristics, such as average weekly wage or cause of loss.
Figure 4: Severity, Company ABC vs. Benchmark, 20X5 to 20X9
Figure 4 examines the severity, or average cost per claim, for Company ABC compared to a benchmark. Even though the benchmark has been adjusted to account for state and class code, it may still not be a perfect representation of peer data.
At first glance, Company ABC appears to be in line with the benchmark in policy years 20X7 to 20X9. This may provide Company ABC with the conclusion that its loss experience is on track. However, after a closer look, it’s noticeable that Company ABC’s severity has increased each year while the benchmark severity has been mostly flat.
Figure 5: Severity, Company ABC vs, Benchmark, 20X5 to 20X9
Figure 5 rearranges Figure 4 to highlight the differences in annual trends for Company ABC and the benchmark. Instead of comparing Company ABC’s data in 20X9 to the benchmark and focusing on the fact that the severity is the same, a more relevant observation is the difference in trends over time. This way, even if the selected benchmark isn’t a perfect fit to the company of interest, it can still provide a guidepost of what we would expect for a severity trend.
This same analysis can be done on many different characteristics of claims, including litigation status, report lag, age or tenure of claimant, or injured part of body. It’s important to keep in mind that the comparison of underlying trends may be more insightful than a direct comparison of metrics.
You are your own best peer
If the millions of data points owned by rating bureaus, TPAs, insurance carriers, and brokers don’t put you at ease that an applicable benchmark exists, it’s time to look in the mirror. When the question is asked: what other companies are exactly like you, the answer is usually none. But there is one—and it’s you.
Figure 6: Severity, 20X1 to 20X9, Pre-program vs. Post-program
With the detailed data analysis available today, it’s getting easier to pinpoint actionable opportunities to improve loss experience. Once the appropriate loss control or claim management efforts are put into place, comparing year-over-year experience, while accounting for external influences, can provide the best benchmark.
In Figure 6, Company ABC noticed its severity was steadily increasing and it was able to identify a few opportunities to help mitigate losses. These programs were put into effect at the start of 20X6. In the years that follow, severity decreased between 20X5 and 20X6 and has since flattened.
Because the benchmark is prior to the inception of the program and is compared to experience post-program for the same company, most other differences seen in benchmarking against peers are eliminated.
Summary
“How do I rank?” may be a popular question for companies when trying to make an appreciable impact on their workers’ compensation loss experience.
While comparing yourself to similar companies using industry benchmarks has its place, it should be just one component in the measurement of your loss experience. It’s also important to recognize that the best benchmark may be yourself. Looking at your own year-over-year trends, in conjunction with the insurance industry’s trends, can help you identify whether your losses are improving or deteriorating, allowing you to step in when necessary to take control of your experience.
If you need help with making appropriate year-over-year comparisons or adjustments to account for internal changes or external influences, your actuary can serve as a great resource to get you started.