1. PEO ADVISOR
RISK MANAGEMENT
© Praxiom Risk Management
May 2011
Features
Top 10 Methods for Identifying Business Risks
- John Keller, CRM ARM CIC AAI
It’s cliché, but risk is everywhere. If you ask a business executive to answer “what is your biggest risk,” you may get 100 different
answers from 100 different people. The worst answer is no answer at all; just a blank stare. The reason is the word “risk” is used
too freely and can be defined in too many different ways to be interchangeable in all industries. So, let’s put some definition
around it and narrow it down for a business context. All executives can do this by asking themselves some simple questions that
will slowly start to identify the biggest threats to the business. Only after a risk has been defined will the 10 best methods for iden-
tifying that risk be useful.
What’s a Risk?
In its simplest form, a risk is a chance of a loss, an uncertainty of loss, a possibility of various outcomes, or the difference between
something that is expected versus what actually happens.
What’s at Risk?
We can classify a risk in several ways, and depending on the industry, the biggest risk to a business lies somewhere in these classifi-
cations:
Property – tangible or intangible
Human Resources – employees, contractors, suppliers/vendors, and other
business relationships in general Ask the Advisor…
Liability – Liability risk can be strict liability or negligence coming from tort, The latest question we’ve been asked is:
contracts, or statutory law, but the most prominent characteristic of a li-
ability risk is that it cannot be accurately measured ahead of time. What is an NCCI form ERM-6 and why is it important
Net Income – Net Income is a bottom line number that would contemplate for a PEO to be familiar with it’s procedure?
fluctuations in human capital, financial markets, governmental regulations, They Answer?
or customers.
The ERM-6 is an NCCI form that facilitates the submis-
Continue reading for details on the top 10 identification methods...
sion of historical payroll and claims data which will be
used to help promulgate an experience modification
rate (EMR) for a company. The data is obtained and
Ethics in Risk Management submitted by “non affiliates” of the NCCI.
- David E. Carothers CSP ARM
Common entities that submit ERM-6 information for
At the beginning of this century we witnessed huge ethical blunders on many the promulgation of an EMR are entities that have
levels—both business and personal. Ethical decision making (or the decision to been self-insured, utilized a TPA, or have had their
ignore ethics) has contributed to events such as the implosion of large corpora- historical information combined with that of a PEO.
tions during a robust economy, and to the collapse of weaker firms as the econ- When an company leaves a PEO, they may request
omy turned sour. To be sure, other factors were involved in almost every case, historical payroll and loss data in order to complete
but ethics remained at the heart of the problem. the ERM-6 and have their own EMR promulgated.
Defined most simply, ethics is “a system of moral principles.” There are various Download the ERM-6 from NCCI
fields of ethics and several iterations of ethics (depending on particular histori-
cal eras), but at the end of the day, ethics is still a moral issue, and oftentimes
If you have a question you’d like answered, email the editor at:
decisions are required to be made at a personal level. RiskAdvisor@praxiom-rm.com.
Many businesses are built on solid ethical foundations. However, temptations
remain. In a strong economy the temptation may be to ignore ethical consid-
erations to maximize profits. In a weak economy, the temptation may be to
ignore sound ethical practices simply to survive. Continue reading...
© 2011 P rax iom Risk Management LLC www.prax iom-rm. com
Prax iom Risk Management is a Certified Risk Management and Safety P rofessional firm. 05/11

2. PEO
RISK MANAGEMENT
ADVISOR © Praxiom Risk Management
Measuring PEO Performance Evaluate your PEO’s practices vs CI
certification guidelines...
This section is dedicated to those PEOs that manage their Workers
Compensation program through a Large Deductible or captive As we review the CI’s best practices for PEO risk management in each
arrangement, and utilize positive results as a profit center. Each of their 5 categories, evaluate how your PEO stacks up by answering
month we highlight different performance metrics that should be these questions:
used to better understand a PEOs WC frequency, severity, and
Basic Organizational Requirements
profitability performance.
The Recordable Ratio Full Service – Is the PEO contractually assuming the right to pay
wages and taxes? Is this service being performed? Is payroll and tax
The Recordable Ratio is a metric used by OSHA and the Bureau of administration promised in sales and proposal materials? Does the
Labor and Statistics. It is the ratio of (# of OSHA recordable inci- CSA have wording which gives the PEO direction and control of work-
dents / 200,000 hours), where 200,000 hours represents the aver- site employees? Does the CSA state the PEO will proved WC cover-
age number of hours worked by 100 employees in a year. age, safety policies, and on-site risk control? Are these services being
This ratio is another way of measuring frequency, but since all delivered?
recordable incidents do not develop into workers compensation Written Business Plan – Does the business plan describe key service
claims, it can be though of as a claim indicator. offerings and provide details of how they will be delivered? Does the
While it has always been our professional recommendation for business plan identify target geographic markets and client types? Is
PEOs NOT to sign off on client OSHA logs, but if a PEO receives or there an “Ideal Client Profile” defined with SIC codes, WC codes or
tracks the OSHA logs for it’s clients, the analysis and aggregation of other types of coding? Is there a detailed sales and marketing strat-
egy that includes marketing techniques, target demographic and
the OSHA log statistics can be used for tracking and benchmarking
growth projections? Are client retention goals defined?
purposes.
The Bureau of Labor and Statistics provides historical ratios, by Organizational Structure/Staffing - Is there a clear separation be-
industry, for the use of the general public. You can access and tween sales and risk assessment decisions? Do job descriptions de-
query their database at their website: fine education and qualification requirements for staff? Are there
defined qualification requirements for contract ser-
http://data.bls.gov/cgi-bin/dsrv?ii
vice providers?
Basic Record Retention – Is client information, un-
Workers Compensation Highlights derwriting data, and historical loss information re-
tained for on demand retrieval? Can key PEO manag-
Grabbing Hold of the Tail
By Bill Zachry
ers access and provide records upon request from the WC carrier
In workers' comp insurance, a tail is the length of time it takes to within 24 hours?
completely close all the claims and exposure from a particular acci- Employee Handbook – Does the employee handbook document
dent year.
shared responsibility for hiring, discipline and termination? Is a
It is my theory that the settlement philosophy that is currently signed receipt required from each worksite employee and kept in the
being used by many of claims administrators is a major underlying
client file?
reason that workers' compensation has a long and expensive tail.
When I was a baby claims examiner, I was taken into the back Controllable Business Structure - Is there confirmation that there are
room, was given the secret examiner handshake and was also told no wages listed in state that are not on the client list? Any evidence
the following: that would indicate “piggybacking?”
"If the employee is still working at the insured, and if the insured is
still on risk, then stipulate to provide partial disability and lifetime For more on CI requirements visit: www.certificationinstitute.org
future medical care. If the employee is no longer working at the
insured, or if the insured is no longer on risk, then C&R the claim."
Continue reading...
© 2011 P rax iom Risk Management LLC www.prax iom-rm. com
Prax iom Risk Management is a Certified Risk Management and Safety P rofessional firm. 05/11

3. PEO
RISK MANAGEMENT
ADVISOR © Praxiom Risk Management
Benchmarking
The Benchmarking section is used to outline various industries in terms of their Workers Compensation risk factors, historical claims statistics, and
key loss sources. Benchmarking statistics are obtained from a variety of credible sources including the largest WC insurance companies in the U.S.
and The Bureau of Labor and Statistics. The statistics used are aggregated from all states and averaged over a 5 year rolling period. All stats be-
low are from claims incurred between 1/1/06—12/31/10.
Rate Definitions:
Frequency Rate = # non $0 claims / payroll per $1M Recordable = # OSHA recordable incidents / 200,000 hours1
Loss Rate = Total Incurred $ / payroll per $100 DART = incidents w/ Days Away, Restricted duty or job Transfer / 200,000 hours1
This month we continue our look at professional services with a review of Auto Body Repair Services.
7532 - Auto Body Loss Sources Average Inc. % Inc % Claims
Industry SIC:Repair
Slip/Fall - Same Level $ 24,002 42.3% 9.9%
As of:1/31/2011
Material Handling $ 9,787 40.0% 22.5%
Period:1/1/06 - 12/31/2010
Struck By/Against $ 1,279 8.4% 36.8%
Average Incurred $5,601
Slip/Fall - Elevated $ 6,481 4.1% 3.6%
Average Paid $4,861
Hand Tool $ 1,386 2.8% 11.5%
% claims > $10,000 7.9%
All Other 2.4% 15.8%
% Incurred >$10,000 84.6%
SIC 7532 - Top 5 Loss Sources % Total Incurred
% claims >$25,000 4.7% Slip/Fall - Hand Tool
All Other
Elevated 3%
% Incurred >$25,000 75.9% Struck By 4% 2%
NAIC 811100 9%
Slip/Fall -
Key Metrics - SIC 75xx BLS Stat 2006 2007 2008 2009 Same Level
42%
Frequency Rate 1.57 Recordable 3.1 3.9 3.8 3.7 Material
Handling
Loss Rate $0.65 DART 1.4 1.8 1.9 1.8 40%
Over the past six months Avg Incurred % Claims > % Incurred Frequency
we have reviewed bench- SIC—Description Avg Paid Loss Rate
per Claim $10,000 >$10,000 Rate
marking statistics for sev- 6411 - Insurance Agencies $ 9,003 $ 5,813 11.5% 91.1% 0.26 $ 0.20
eral common professional 6531 - Real Estate Agencies $ 7,116 $ 5,401 10.5% 88.5% 1.20 $ 0.59
service industries. 7349 - Building Maintenance $ 7,356 $ 5,566 12.7% 87.4% 0.90 $ 0.64
This table is a summary of 7363 - PEOs $ 5,343 $ 3,400 8.4% 89.6% 0.90 $ 0.64
those metrics. We encour- 7532 - Auto Body Repair $ 5,601 $ 4,861 7.9% 84.6% 1.57 $ 0.65
age PEOs to analyze their 7538 - General Auto Repair $ 6,639 $ 5,363 8.2% 86.9% 1.57 $ 0.65
own book of business, by 8011 - Physicians Offices $ 3,475 $ 2,733 4.8% 96.3% 0.92 $ 0.30
industry, to better under- 8051 - Skilled Nursing $ 4,250 $ 3,409 9.5% 84.7% 0.92 $ 0.30
stand their exposures, loss
8111 - Legal Services $ 7,262 $ 5,275 11.8% 90.6% 0.07 $ 0.03
trends and to make effi-
8711 - Engineering $ 7,497 $ 6,246 11.9% 90.2% 0.67 $ 0.69
8712 - Architecture $ 2,951 $ 2,875 5.1% 83.0% 0.21 $ 0.40
cient use of your risk con-
8721 - Accounting $ 8,985 $ 7,044 10.3% 92.0% 0.21 $ 0.40
trol resources.
1—200,000 hours represents the amount of time worked by 100 WSE in one year
© 2011 P rax iom Risk Management LLC www.prax iom-rm. com
Prax iom Risk Management is a Certified Risk Management and Safety P rofessional firm. 05/11

4. PEO
RISK MANAGEMENT
ADVISOR © Praxiom Risk Management
Stay Connected...
If you haven’t already joined, there is now a group on LinkedIn dedicated to PEO
Risk Management. All PEO Executives and Risk Managers are encouraged to join
and participate in the online discussions. Or, you can simply follow the news posts that relate to PEO,
Risk Management, and Workers Compensation.
Click here to go to the PEO Risk Management group on LinkedIn and join.
With PEO Risk Management professionals averaging 20 years of experience and encompassing a
broad range of industry expertise, Praxiom Risk Management is committed to providing a wide
range of resources to help PEOs mitigate risk and grow their Workers Compensation profit center.
This PEO RM Advisor is a monthly e-newsletter designed to keep PEO executives and Risk Manage-
ment professionals informed of relevant topics in the area of PEO risk management. Sharing infor-
mation and best practice through e-newsletters is one of the many ways we help support PEO or-
ganizations' risk management efforts.
If you would like to contribute industry specific content or articles for publication in the areas be-
low, you may submit them to the Editor at:
RiskAdvisor@praxiom-rm.com.
Loss Control
Claims Management
Performance Metrics
RM Information Systems
Policy Administration
Carrier Relationships
Industry Certifications
Up Next…
We’ll continue with our performance benchmarking of service com-
panies with a look into the WC results of:
7011—Hotels
6512—Non Residential Building Operators
© 2011 P rax iom Risk Management LLC www.prax iom-rm. com
Prax iom Risk Management is a Certified Risk Management and Safety P rofessional firm. 05/11