Managing Your Risk
Benchmarking an important tool for improvement

Measuring, comparing trends helps to identify trouble spots

By Michael Kelly
Property and Casualty Program Specialist

During our March 2009 Risk Management Pools regional meetings, I introduced the process of establishing and utilizing benchmarks to help develop an initial focal point for your risk management efforts. And in the December 2010 issue of CountyLines, Bob Carruth, risk control manager for the Pools, introduced the County Safety Index, essentially establishing and publishing some of our own benchmarks at a state level. So what exactly is "benchmarking" and how is it used in managing your risk?

Benchmarking has generally been defined as "continually comparing an organization's performance against that of the best in their industry or best in class to determine what should be improved" (CRM – Principals of Risk Management – The National Alliance). Stated more directly, it is a tool that utilizes a simple statistical method to continually compare your county's risk management performance against that of your peers in an effort to improve.

Perhaps even more important, benchmarking allows a running compendium of how your county compares to itself in prior periods. Measuring and recording benchmark trends against your own prior experience will quickly illustrate not just the progress (or regress) of your risk management program, but it can pinpoint areas that need the most attention.

The first step is to determine which areas you think need improvement and should be benchmarked. Are there specific departments or county operations that tend to generate more loss activity than others? It is also important to try not to measure too much initially, but rather focus on the glaring areas that your intuition points you to.

Select the items that are to be measured, such as the average cost per liability claim per year; or the percentage of total open liability claims also on an annual basis. Establish a spreadsheet for all benchmark values and plot the results over a specific timeframe (annually, quarterly, etc.). These computations are simple to perform and require very little math skills.

Other examples for liability benchmarking might be: average claim duration, frequency of claims, duration in time of a liability claim, or the amount of lag time between the date of occurrence and the notice to your insurance carrier. For workers' compensation, normally managers will want to benchmark the average cost per claim, the annual cost per full-time employee, the loss frequency rate, percentage of open claims, average claim time duration and the workers' compensation cost expressed as a percentage of total payroll.

The next step is to collect the data. The sources of information used to establish most benchmarking computations are the loss reports received from your insurance carrier(s) as well as the inclusion of any self-insured retentions and/or deductibles. The data needs to be consistent in composition, and the longer the time period of claim information at your disposal, the better.

After collecting your data and recording the benchmark numbers, contrast your values to your peers, paying more attention to where your numbers are trending worse than theirs or your own prior values. The gaps or differences between these numbers are your starting point and are used to begin the process of setting goals and establishing an action plan for improvement. Goals such as fewer injuries each year, shorter lag times for claim reporting, or a decrease in the frequency of occurrence are examples for the basis of an action plan.

The practice of benchmarking allows you to learn from the successes of others, especially when contrasted to a similar neighboring county. In addition it may provide county management with a means to prioritize operational areas needing improvement. It will establish a base-line measurement upon which you can compare yourself through the years, giving management hard numbers that can be helpful to justify allocating the cost of risk back among the departments or entities driving the highest risk costs.

The final step is to continually monitor and record your results. This is imperative to facilitate continued improvement, allowing you to know what is working – and as such should be continued – verses what is not and should be adjusted or even discontinued. As the recorded time increases, you will have extremely valuable information that will serve immensely in county risk management decisions.

Sources for established benchmark formulas are many thanks to the Internet and such organizations as the Public Risk Management Association (PRiMA), the Public Entity Risk Institute (PERI), and the Risk and Insurance Management Society, Inc. (RIMS). If you have trouble finding examples, e-mail me and I will send you some to get you started.

NCACC Property and Casualty Program Specialist Michael Kelly writes a regular column on risk management for CountyLines. With more than 32 years of risk management/insurance experience, he holds the Associate in Risk Management for Public Entities, Certified Risk Managers and Certified Insurance Counselors professional designations. He can be reached at michael.kelly@ncacc.org or (919) 719-1124. Archived versions of the column can be found online at www.ncacc.org/managingyourrisk.html.