RISKVUE ARCHIVE | QUESTIONS OF THE MONTH

Setting Up a Loss-Allocation System

Dear riskVue: We're a large manufacturer based in California with several distribution centers nationwide. Some of our locations have a serious auto accident and injury problem; other locations haven't had auto or WC claims for years. Obviously, we need a way to motivate loss control in those locations where accidents and injuries are a problem. We want to set up a program whereby the high-loss locations are penalized and pay more as their fair share of premiums than the low-loss locations. Where can I get some guidelines for setting up such a loss-allocation system?

There are several examples of a loss allocation system available through the Resources Library on the RIMS.org website under the Products & Services tab.

You can also set up a simple system allocating total premiums & insurance overheads based on a system(equal amounts, based on sq. ft.) and add a risk factor based on the location's claims over the total claims for all locations. Another method I have encountered is to charge the actual claims paid three years prior to the locations as a risk factor.

Dave Riggs, CRM, ARM, RF

The best is always the simplest -- I have never seen anything better than an article entitled "Useful Proposals for Managers: Charge Total Casualty Claims Costs against the Operating Unit’s Profit" by Charles V. Culbertson and John D. Woods, published in the May 1982 issue of Professional Safety.

Jim Rhoads

Weigh losses according to ISO's experience rating formulas and base allocation of risk cost according to the results. The system is wonderfully fair and highly effective.

(1) Calculate estimated premium for each location using ISO rating methodology.

(2) Determine chargeable sums for claims by type based upon weighted premium.

(3) Apply losses to location using the ISO formulas.

(4) Allocate cost of risk by location based upon the weighted sums developed using the formulas.

(5) Put on some nice music and a first rate headset. The screaming will be loud and fierce. The frequent loss locations, even with the very temperate allocations on allowable costs permitted to be charged based on premium size, will receive an expensive education.

James R. Mahurin, CPCU, ARM

Your insurance broker, insurance carrier, risk manager, CFO and accounting department (or outside accountant) can devise a cost allocation system for you in which divisions or locations pay a share of insurance premiums based on a number of factors, one of which is certainly actual loss experience. The upside is it does give divisions or locations an incentive to implement safety and loss control programs to reduce risks of loss or injury and to better manage injuries or losses when they do occur. One caution -- whatever allocation system you design must have a cap on single losses and aggregate totals. As example, we are a municipality. If we had a catastrophic loss, as example a half dozen firefighters killed in a building fire, the losses would be huge. The Fire Dept should not be responsible nor penalized in one year for the entire loss applied to their experience ratings and should be capped at a predetermined level, as example the first $25,000 of any single loss and a $50,000 per year aggregate -- just throwing those numbers out as examples but it's still dollar one charged to their budgets up to the caps. In the example above, without a cap Fire would end up paying for the entire insurance premiums for the entire entity for the next year and that would not be fair.

The cat losses are the most rare. Where you're getting nickel and dimed to death are the small losses and they add up in a big hurry. Cost allocation for loss experience is only one of the pieces you need to put in place for an adequate and effective loss control program. By itself it will not solve your problems. Make it a global picture and effort and implement a solid loss control program company wide, including experiential loss cost allocations and then allow your location management to tailor parts of the loss programs to their location. What works in CA might not work very well in South Carolina and you have to factor that in. Finally, make danged sure whatever loss programs put in place have the unwavering and unyielding support from senior management. That's a must.

Keith L'Esperance

riskVue | The webzine for risk management professionals
September 2007