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Tracking loss: Indexing progress at the workers' compensation Board of British Columbia

Risk Management, Dec 2001 by Sullivan, Laura

Ella Young and her team created an index of comparison to measure losses for the Workers' Compensation Board of British Columbia.

When the power company that Ella Young worked for in Alberta was making changes three years ago, she had to make a decision: Move to its Houston headquarters or find a new job. What influenced her choice was working with the power company's risk management department on a project, which had perked her interest in the field, and inspired a career shift.

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"I was interested in risk management, but not risk management dealing with insurance," she says. So when a job of that billing came up at the Workers' Compensation Board (WCB) of British Columbia, she applied and got the position as a risk manager in its fledgling risk management department, where the mandate is to minimize financial risk exposure to the board-but not through insurance means.

Bringing the New Team Together

In early 2000, Young's boss, the vice president of finance at the WCB, came to her with a concern. "There was no single place where he could go and see how the board was performing from various perspectives," she says. He wanted the equivalent of the Toronto Stock Exchange (TSE) 300 for the WCB.

In response, Young began an indexing project that would not only introduce the risk management department to the rest of the organization, but also offer an opportunity to bring that team together.

"It's only been in the last little while that the department has gotten up to speed," she says. "I thought that this project would be a good opportunity to get the whole department working together, and that's what happened."

The indexes she wanted to create would show the change over time of different performance measures with respect to past reference points. In forming the indexes and deciding which data to use in creating them, Young met with all of the divisions at the WCB. "It was a good opportunity to get exposure for risk management to all of the WCB, and also for them to get exposure to us, and work with us on the project," she says.

The question posed was: What are the main things that drive business at the WCB? The risk management group came up with three points:

* claims volumes

* claims costs

* future liabilities on outstanding claims

Each of these drivers affects particular groups within the WCB. The prevention division, for example, had input into creating the claims volume index because its mandate is to make sure claims do not happen. The compensation services division worked on the claims cost index because this would allow it to track its business. And the future liability index benefited from the input of the assessments, actuarial and stats services departments.

Creating the Indexes

Taking the three drivers, Young and her team created three indexes:

* First Short Term Disability (FSTD) Index-performance of each sector or subsector in terms of new short term disability claims volume

* Claim Cost Index-performance of each sector or subsector in terms of monthly cash payments, regardless of injury date

* Fully Reserved Claim Cost (FRCC) Index-performance of each sector or subsector in terms of the total potential cash outflow associated with all claims

Each of these indexes compare either all business sectors-of which there are seven in total: service, primary resource, manufacturing, construction, transportation and warehousing, trade, and public-or a single sector, such as trade, and its subsectors, such as retail and wholesale.

To create useful tools from the available data, certain rules of statistical analysis have to be obeyed. For example, certain data are excluded from the indexes. For the claim cost index, survivor costs and payments are excluded because the costs tend to be very high and the occurrences infrequent. "We ended up seeing spikes in different months," Young explains. "That adds noise to the data that you don't want because it can mess up what's really going on. So we took that out."

Claims cost numbers are also adjusted by the British Columbia Consumer Price Index to eliminate the effect of economy-linked events, such as wage increases. In addition, certain subsectors-business services and professional, scientific and technical services-are not included because they have only recently been covered by the WCB and the available data for them is limited.

"[Also,] to smooth out the seasonal component of the raw time series and to get a better idea of long-term trends, we calculate and graph a twelve-month moving average," Young says. For example, the August 2000 smoothed index would be calculated by adding the index values from September 1999 through August 2000 and dividing that sum by twelve.

A Selection of Reports

The indexes that the risk management department creates are available to users-any employee in the organization-in three formats: pie chart, indexes graph or drivers graph.

Pie Chart. The pie chart shows the percentage of cost or claims numbers from each sector (when all sectors are being examined) or from each subsector (when one sector is being examined) that make up the whole, i.e., how big a piece of the pie each takes up. The numbers are normalized, such that the total adds up to 100 percent.

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Tracking loss: Indexing progress at the workers' compensation Board of British Columbia

Risk Management, Dec 2001 by Sullivan, Laura

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