As senior executives across all industries rely increasingly on robust data and analytics to drive decisions on internal investments and resource allocation, safety directors may need to adjust their reporting practices to reinforce how they demonstrate value and enhance the sustainability of their initiatives.
Here are seven steps for safety directors to quantify the value they deliver in ways that will be understood and appreciated by their organization’s senior leadership.
1. Understand the evolving role of risk management in your organization and how safety can help.
From engagement in safety practices and property loss control to insurance purchasing and claims management, risk managers are involved in all aspects of protecting their organization’s assets, personnel and customer relationships. Significantly, as the risks facing organizations have become increasingly complex, the role of the risk management function has expanded.
Today, risk management executives are increasingly involved in driving or supporting their companies’ enterprise risk management initiatives, providing risk-based insights and perspectives to help with strategic, financial and operational decision-making. In addition to working across the organization, risk managers are actively involved with insurance brokers and agents on insurance coverages and program structures designed to reduce the organization’s total cost of risk.
Whether as part of the risk management team or a separate function within human resources, finance or operations, the safety team typically must collaborate closely and communicate regularly with members of the risk management team. So, it makes sense to understand the role of risk management within your organization, the priorities for the function as set by leadership, and its principal objectives in fulfilling its mission.
2. Become familiar with risk management terminology.
A critical and nearly universal objective for many risk management departments is to reduce the company’s cost of risk. Drawing from the annual RIMS-Ernst & Young Cost of Risk Survey, the elements of the cost of risk include: insurance premiums; retained losses (i.e., retentions or deductibles for loss amounts or claims before any insurance coverage applies); the cost of implementing any internal risk management measures and tools, such as technology; outside services, such as wholesalers; claims administration, including internal resources dedicated to self-administration or outsourced services provided by third-party administrators; and insurance brokerage fees.
For most organizations, the total cost of risk typically represents 1-3% of company revenues (for small companies the percentage may be higher). Usually, the highest component of this cost is in workers’ compensation and general liability, auto liability and excess or umbrella liability, depending on the type of company. For example, a ladder manufacturer may have relatively low workers’ compensation cost, but higher general liability cost. On the other hand, a steel erection company may have high workers’ compensation cost, but lower general liability cost.
3. Use the language of the C-suite.
Members of a company’s senior management team, as well as those in the risk management function, typically express investments and costs in the context of various financial terms, including:
Return on investment (ROI). This performance metric is used to evaluate the efficiency of an investment or to compare the relative efficiencies of different investments. In presenting to management, those seeking budget approvals or funding need to show how proposed expenditures will produce a positive return and deliver acceptable value to the organization.
Earnings per share (EPS). The portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Be careful with this, unless you are expecting really large returns on your safety efforts or there are relatively few outstanding shares.
Revenue growth. An increase of a company’s sales when compared to a previous month, quarter, or year’s revenue performance. Current sales figures can be compared on a year-over-year basis or sequentially. This is valuable for comparing workers’ compensation, auto liability and general liability cost trends to revenue.
Workers’ compensation, general liability, or auto liability cost per item made. This can be helpful in demonstrating how workers’ compensation, general liability, and/or auto liability claims costs affect the cost of products manufactured by an organization. It can be used to show senior management if claims costs are coming down or going up relative to goods produced.
Other metrics that can demonstrate value derived from safety initiatives include general liability or workers’ compensation cost as a percent of payroll.
4. Don’t overlook the value of sound benchmarking practices.
Across any organization, effective benchmarking is often the key to continuous improvement. In the context of safety initiatives, benchmarking itself may be a continuous improvement process as standards are set based on best practices and performances in certain departments or operations that are then introduced and pursued in other areas.
On a broader basis, safety practices and results can be benchmarked within industry sectors, among employers in specific geographic areas, and with similar size and levels of automation. Two major sources for benchmarking data include the Bureau of Labor Statistics (BLS) and Risk Management Society (RIMS).
The BLS metric, based on man hours, provides opportunities for assessment based on total recordable accident/incident rate, lost-time rate, days away from work, as well as other recordable data, and fatality rates. Meanwhile, RIMS benchmarking data, which track cost per $1,000 revenue, can be used to assess liability trends, workers’ compensation, property, outside vendors/consultants, and risk management administration.
5. Align safety initiatives with risk management goals.
In the current business environment, many risk management departments face the challenge to drive down costs in a hardening insurance market. In this context, the ability of safety directors to express the results of effective safety initiatives in terms of reduced costs and enhanced productivity may be critical to their sustainability.
Safety professionals should leverage tracking tools to assess performance against goals. Understanding the relationship between safety efforts and results will also facilitate the establishment of more accurate loss forecasting. This is valuable to risk management in determining cash flow needs for self-funding of casualty risks, such as through taking higher insurance retentions or deductibles in their insurance programs.
6. Express statistics in formats understood by management and employees.
Work with your company’s risk management team to chart your progress against stated goals. Is there measurable improvement within specific timeframes, such as quarter over quarter, or quarter vs. same the prior year, etc.? Are accident frequency and severity down? What’s the impact on cost?
Are you capturing incident and loss data on a timely basis and do you have reliable data to conduct accurate loss forecasting? Are claims allocations decreasing across the board and at more difficult locations or higher risk operations? Risk management in turn can use this information to adjust the structure of the liability or workers’ compensation insurance program to take larger retentions and reduce premium costs.
7. Understand your organization’s insurance program design.
When insurance market conditions are favorable to buyers, some employers will opt for guaranteed cost programs based on the size of the organization. With a guaranteed cost program, the company pays the premium and all the claims are paid by the carrier While poor loss experience will affect these employers in other ways, it will not have an immediate impact on premium costs because most carriers will use a three-year loss ratio for underwriting purposes. In these situations, safety professionals may need to emphasize the positive impact of their initiatives using cost metrics that focus on such areas as improvements in productivity, employee morale (as indicated by job satisfaction and employee retention rates), not to mention reduced accident incident and severity rates.
On the other hand, improvements in safety results as measured by lower accident rates and decreased severity have immediate and readily measurable cost impacts on workers’ compensation programs that are fully self-insured, or that feature high deductibles and retentions.
By aligning safety results and benchmarking with metrics reported by their organization’s risk management, insurance and finance disciplines, safety directors will be better positioned to demonstrate how safety measures impact total cost of risk over time, as well as other critical cost variables scrutinized by senior leadership. These measures may also lead to increased synergies with risk management, insurance and finance that will help drive performance and raise the profile of the safety function across the enterprise. EHS
Scott Lassila, CSP, ASP, CSM, APS, a managing consultant in the Casualty Risk Consulting practice of Aon (www.aon.com), specializes in workers’ compensation and general liability risk control, including: evaluation of management control systems applied to safety, program development, safety culture improvement, behavior-based safety and training.