Integrated Benefits/Absence Management Operational Risk Management and Measurement from the Buyer’s Perspective CAS/SOA: Enterprise Risk Management Symposium July 30, 2003 Washington, D.C Claus S. Metzner, FSA, FCAS, MAAA, Aktuar-SAV EPIC Actuaries, LLC

Risk Management/Measurement Base Line Define and Measure the total cost of unplanned absences: Base Line Direct benefit cost (retained by employer) Cost of replacement workers/additional staff Productivity cost Insurance cost Regulatory costs (OSHA) Legal costs

Risk Management/Measurement Develop the Risk Tolerance Function What level of unplanned absence cost is acceptable Function of revenue Function of earnings Function of capital Function of payroll If current cost is not within acceptable range, what improvement is necessary Benchmarking is relevant

Risk Management/Measurement Project Cost into the Future Base Line: no change in current practices Alternatives: change method of benefit delivery – integrate various delivery systems Develop appropriate metrics What are the expectations for reductions in the frequency/severity of unplanned absences What are the implications on productivity What are the expected insurance cost savings relative to the base line

Risk Management/Measurement ROI: Assess ROI on the basis of Marginal Cost of implementing an Integrated Absence Management Program Marginal Reduction of Direct and Indirect Costs of Unplanned Absences Alternative Risk Financing Programs (captives, self insurance, higher Self Insured Retentions) may lead to additional cost saving

Risk Management/Measurement Monitoring Develop metrics to differentiate normal statistical fluctuation from “real” change relative to the baseline Frequency may be a “better” measure than severity Severity should be by type of absence

Role of Demographic Analysis Previous discussion focused on a macro oriented review Consider: what do we “know” regarding employees to refine the analysis Employers may not be collecting all the data or may not know, yet, how powerful their data base is

Role of Demographic Analysis Comparisons/Benchmarking With other companies Over time within a company Between locations/business units within a company Comparisons shed light on potential competitive advantage from optimizing costs of absences

Role of Demographic Analysis Sources of information Insurance costs (may be retained by company) Short term disability Medical costs (including group health) Long term disability Workers Compensation The above provide a “framework”

Role of Demographic Analysis Need to “normalize” the data to a comparable distribution for each entity for which a benchmarking is undertaken Age Gender Type of employment Geographic cost differences Etc.

Role of Demographic Analysis Need to work from individual employee characteristics to a “portfolio” of employees Obtain “claim” data per employee Employment/payroll records Medical claims Wellness and disease management information Workers compensation claims Short term disability claims Other unplanned absences Maintain appropriate mechanisms to assure privacy is maintained

Role of Demographic Analysis Obtain census data Age Sex Marital status Children in household Location Consider other data Insurance credit score may be relevant

Role of Demographic Analysis Use Multi-Variate Analysis Develop a “score” for potential risk/risk profile (similar to Auto Liability) Statistical relevancy is the key “Score” measures relative frequency/severity Focus on employees exhibiting “high” scores Develop targeted absence management programs Use the individual scores to develop a company wide average score for monitoring Changes in score can be used to disaggregate changes in cost between changes in score (internal) versus changes in external costs

Summary Integrated Benefits/Absence Management Is an Operational Risk Management Issue Historical “Silo” view is not optimal for assessing overall costs/benefits Can optimize the expenditure if we take an integrated view ROI Analysis is needed Framework as for other investment decisions Detailed Demographic Analysis is Necessary to Obtain Relevant Insights Multi-Variate Analysis is the key Can view this as a data mining exercise