Managing loss-cost differences: to attract and retain larger and more sophisticated casualty customers, focus on the total cost of risk.

The key to success with customers in the large casualty market is loss-cost management. This means considering not only fixed cost components such as premiums, fees and expenses, but also the variable cost components of losses and loss expense. Both impact the total cost of risk to your customer. Generally, these clients purchase loss responsive programs and have a total cost of risk across primary casualty lines of $1 million or more. Given the financial significance of expected losses at higher retention levels, agents and brokers can play a consultative role in helping clients compare claim processes and key metrics among providers, with the goal of focusing on what drives better claim outcomes, ultimately resulting in lower total cost of risk. This holds true for either bundled or unbundled programs. One-dimensional spreadsheeting of fixed costs, although common in the industry, ignores the greater financial impact of loss outcomes on customers' total cost of risk.

A quick guide for analysis of loss-cost metrics recognizes that, on average, fixed costs represent just 20% to 25% of total program costs. The balance is made up of the variable loss and loss expense dollars. Thus, a 10% improvement in loss payout, for example, drives savings that overwhelm typical variances in fixed costs. Many carriers and third party administrators now routinely track claim outcome metrics. That data can confidently be used to build a claim performance scorecard.

For best results, draw comparisons and conclusions by casualty lines of business. Workers' compensation is usually the leading cost-of-risk item in a casualty program and also is more actuarially predictable than liability lines. Start by identifying the states where the customer has sizable exposure and claim frequency. Typically, there will be three to five states driving the loss-cost equation across the entire program. A fact-based comparison among providers by state is more meaningful to customers than national numbers.

Next, consider how the providers' claim office networks align with key customer states. This is a good indicator of ease-of-service delivery and the ability of customers' managers to develop solid working relationships with claim adjusters. In addition, the providers' knowledge of local medical communities and return-to-work protocols greatly influences outcomes.

Then, request the competing providers' book-of-business claim metrics in each of the key states to best quantify outcomes. Areas of impact to consider include:

* Claim reporting/assignment--Earlier is always better. It's widely recognized that the later a claim is reported and assigned, the higher the average severity.

* Determination of compensability--Look for prompt and accurate determinations. Measure results by comparing all indemnity claims reported to those closed with no indemnity or medical payment to reach the percentage of compensable workers' compensation claims.

* Medical network usage and discounts--Maximized employer direction of injured employees to the network drives medical cost savings as well as a high quality of care. For example, in California an employer can direct for the life of the claim if enrolled in the medical provider network versus 30 days control if not participating. In other states, the medical provider is the employee's choice--presenting the most challenging claim management situation. Examine the medical providers in a carrier or TPA network to help ensure that any of your customers' current relationships with doctors, clinics, etc., are included. Compare network penetration (the percentage of paid claim dollars in-network versus out-of-network) in each state deemed important to your customer.

* Medical case management--Early nurse case management on more complex claims leads to effective treatment strategies, medical savings and improved return-to-work results. Are nurse resources available locally or are they remote? Local knowledge and relationships drive better results.

* Medical bill management--Boil it down to what's billed versus what's paid. On a percentage basis, compare what competing providers pay in terms of each medical dollar billed. It's not unusual to have more than a 40% bill reduction after eliminating duplicate billings, applying proper "usual and customary" charges and fee schedules.

Although the ability to control medical cases is more limited in general and auto liability, look for the same themes and areas of impact. Evaluate the availability of investigative services, litigation management programs and staff counsel. As you address customers with more difficult product liability exposures, specialized resources--such as adjusters dedicated to severe product cases and expert outside counsel--can be critical considerations.

Agents and brokers who get beyond fixed costs and provide evaluation of loss-cost differences for customers or prospects will bring the value-added service that buyers in the large casualty segment are seeking.

William Malugen, a Best's Review contributor, is president and chief executive officer of Travelers National Accounts. He can be reached at [e-mail].