W W W . C H I C A G O L A N D R I S K F O R U M . O R G
Reducing Total Cost of Risk via a Well- Designed Cost of Risk Allocation System
November 13, 2018
Jessica Morgan, Vice President Risk & Safety, ABM Industries Mike Chmielewski, Corporate Risk Manager, Ace Hardware Corporation Jeff Doffing, Deputy Group Managing Director & Actuary, Aon
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Introduction
• All organizations desire to minimize Total Cost of Risk (TCOR)
• A well designed Cost of Risk Allocation (CORA) system can incentivize behavior to reduce TCOR
• ABM Industries (ABM) and Ace Hardware Corporation (Ace) both rely on CORA to help reduce TCOR
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Taking care of the People, Places, and Spaces that are important to you!
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Leading Provider of Facility Solutions
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• Founded in Chicago (1924) by local hardware store owners to leverage group purchasing power
• Current Corporate Headquarters in Oak Brook, Illinois – Formed Bermuda based captive in 1996
• Largest retailer-owned hardware cooperative in the industry
• Vast majority are independently owned and operated
• Over 5,000 Retailer owned & operated stores worldwide
• Located in 70 countries and growing
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Considerations • Compare and Contrast Ace and ABM
CORA Approach
• Q & A
Retained Loss & Expense*
*Includes TPA Fees **Brokerage & Consulting Fees, assessments, captive costs
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Determine CORA
• Allocation Approaches: – Prospective vs. Retrospective – Frequency/Severity vs. Total Cost – Dynamic vs. Static
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Prior Year Loss Shortfall 1,000 N/A 1,000
Budget Year Loss Estimate 3,000 3,000 3,000
Budget Year Premium 700 700 700
Budget Year Admin Cost 600 600 600
Total 5,300 4,300 5,300
Total Claims: 300 .
Total Cost: 3,000
Claim Count Total Cost Allocation Allocation
Division A 200 1,500 2,000 1,500
Division B 100 1,500 1,000 1,500
Total 300 3,000 3,000 3,000
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Budget Year Premium 700 700 700 700
Budget Year Admin Cost 600 600 600 600
Actual Budget Year Losses 2,500 N/A 2,500
Total 4,300 4,300 3,800
– Claim counts – Total incurred losses
• Integration with Risk Control & Claims Management Strategies
– Providing regular feedback to those areas generating the most cost
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• Corporate Locations – Roughly 100 Departments
• 15 Regional Service Centers (RSCs) – 6 Departments per RSC – 9 Additional Crossdocks
• $500k Deductible/SIR • Safety reports through Operations • Store locations independently
owned and operated so not part of allocation
• Corporate Locations • 6 Industry Groups
– 23 Regions (2-6 per IG) • 446 Branches (2-65 per Region)
• $1M Deductible/SIR • Safety reports through Risk
Management • Transitioning from a service line
focus to industry group focus
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Determine CORA
Determine CORA
Administrative 0.7 7.5
Insurance Premiums TCOR
Determine CORA
Determine CORA
• Corporate locations rated on an industry GC basis
Department allocation = Department payroll x Department Loss Rate plus proportionate share of admin & excess premiums
• Loss Rates by Region within each IG (CA vs. AOS)
• Conversion to premium rates • Experience Modification
Factors (EMFs) by Branch • Single loss rate for all corporate
locations
Branch allocation = Branch payroll x Regional Premium Rate x Branch EMF
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Determine CORA
Determine CORA
• Quarterly monitoring report sent to Corporate Safety, RSCs and Management
• Monitoring report measures claim counts vs. budget and total losses vs. budget
• Only adjust to actual variances at year end.
• Monthly based on claims reported during the month
• Fixed deductible of $2,500 per claim charged in addition to the monthly budgeted allocation amount
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Branch B
AS OF 9/30/18 YTD
YTD BUDGET ALLOCATION FOR THE 1/1/18-19 FISCAL YEAR WITH RESULTS AS OF 9/30/18 YTD. YTD WC YTD Implied YTD Incurred YTD Actual Implied Implied Claim Count Actual Frequency Loss($) Incurred Loss($) Total ($) Budget Claim Count Variance($) Budget Loss($) Variance Variance RSC A 8 5 13,970 35,413 196,696 (161,283) (73,656)
RSC B 6 13 (29,151) 23,751 16,053 7,698 (10,726)
RSC C 6 6 0 87,636 21,792 65,844 32,922
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Understandability
Determine CORA
1/1/18-19 WC BUDGET - VARIABLE COST VIEW
AS OF 9/30/18 YTD
YTD BUDGET ALLOCATION FOR THE 1/1/18-19 FISCAL YEAR WITH RESULTS AS OF 9/30/18 YTD.
YTD Budgeted YTD Actual YTD Actual
YTD WC YTD Implied YTD Incurred YTD Actual Implied Implied Claim Count Claim Count Incurred Loss
Claim Count Actual Frequency Loss($) Incurred Loss($) Total ($) Hours Per 200,000 Per 200,000 ($'s) Per 100
Budget Claim Count Variance($) Budget Loss($) Variance Variance Worked Hours Worked Hours Worked Hours Worked
RSC A 8 5 13,970 35,413 196,696 (161,283) (73,656) 393,481 4.1 2.5 50.0
RSC B 6 13 (29,151) 23,751 16,053 7,698 (10,726) 127,456 9.4 20.4 12.6
RSC C 6 6 0 87,636 21,792 65,844 32,922 321,658 3.7 3.7 6.8
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Determine CORA
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Corporate WC Allocation Goal
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Considerations • Compare and Contrast Ace and ABM
CORA Approach
• Q & A