Integrated Benefits/Absence Management Operational Risk Management and Measurement from the Buyer’s Perspective

1. Integrated Benefits/Absence ManagementOperational 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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”

10. 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.

11. 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

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

13. 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

14. 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