During a recent happy hour, Larry Poague, a Senior Risk and Safety Consultant from Holmes Murphy, and Melissa Huenefeldt, a Consulting Actuary from Milliman, exchanged ideas about how actuaries and safety professionals can, and should, work together. This paper is the result of that conversation.

If you are early in your loss prevention career, don’t fret if you haven’t seen any loss data. Your focus might be less on the loss activity and more on a particular claim type that has become more frequent or more expensive, and you don’t have sight of the bigger picture. As you become more proficient in risk management, you should strive to understand what the “C-suite” looks at when determining actual cost of risk. The better understanding that you have of these different methods of claim measurement, the more accurate the statements you can make about your company’s risk performance will be.

Actuaries and safety professionals don’t interact directly as often as they should. Actuaries tend to focus on future financial results,¹ while safety professionals are concerned with what is happening currently. Because of this mismatch in timing, safety professionals may shy away from being involved in conversations with their companies’ in-house or consulting actuaries; however, this paper demonstrates that there is great value for both parties when they connect, just as the two authors of this paper have.

In this paper, Melissa will provide the actuarial viewpoint and Larry will speak as the safety professional, and together we will show you how the synergy between the two professions can make everyone more successful.

We first provide a primer on loss data evaluations and calculations that actuaries can provide to assist safety professionals as they focus on their initiatives. Additionally, we will explain how actuaries, too, can benefit from conversations with safety professionals.

Primer on loss data evaluations

If you flip through an actuarial report, you will see a lot of numbers. Without a proper road map, they can be intimidating, but there is value in those numbers once you understand what you are looking for.

There are typically three types of loss data evaluations found in an actuarial report: currently valued, green-to-green, and developed; each type of data can provide different insights into what is happening at your company.

Currently valued

Larry: Currently valued losses can really throw off a safety professional’s expectations. It often appears that things are getting better, but that is a trick because we are still missing a lot of information from the current year. There’s often a lot that’s going to happen to add costs to the latest 12 months. We just don’t know exactly what it is. Think about that stubbed toe claim that should have settled for $500 and turned into a $50,000 dollar claim because the injured employee went swimming, and the toe got infected. A currently valued loss wouldn’t have accounted for the upcoming infection. On the other hand, the older a claim becomes, the more likely it will hold close to its value. Now to gussy up the explanation, Melissa is going to take it from here.

Melissa: Currently valued loss data is valued as of a set point in time, for example December 31, 2023. This means that everything that has happened in the experience period is included up until that date. Any claims that have been reported as of that date are included; however, there may be claims that have occurred but have yet to be reported, and they are not included in this data set.

This data also includes the financials (paid loss and case reserves) as of that date. Because everything is valued as of the same date, policy years are not comparable. The policy year that incepted on January 1, 2023, would be 12 months old while the policy year that incepted on January 1, 2019, would be 48 months old.

Given the difference in these ages, we can’t say that policy year 2019 is better or worse than policy year 2023. Policy year 2023 may still have claims that have not yet been reported, especially if we are looking at a long-tailed line of business such as workers’ compensation. There is likely a greater number of open claims in policy year 2023 than for policy year 2019, causing greater uncertainty about how this year will ultimately finish once all claims are closed and paid.

Actuaries start their analysis with currently valued losses and estimate future development in order to understand how each year will ultimately perform.

Safety and risk professionals should understand that a majority of the loss runs they receive will be currently valued unless they specifically request a green-to-green or developed view.

Green-to-green

Larry: When acting in a “boots on the ground” risk position, green-to-green is a great view of how things are going. It can tell you at the end of every year (or specific period of time) what your impact has been. I always like to associate this with the bull-riding story: the fewer bulls (claims) I load into the chute, the fewer there will be for the rodeo clowns to deal with. More claims mean a higher likelihood something could go wrong or that more things could develop. We never know when a chute rooster is going to throw a wrench in the works. To explain this whole hootenanny, Melissa is going to give us some examples.

Melissa: In this evaluation, you are looking at all policy years at the same age, that is, the same months from inception. Because we are looking at the losses at the same evaluation point, you can make year-over-year comparisons to identify any improvements or deterioration in experience.

In an actuarial report, this loss data evaluation is found in a loss development triangle (see Figure 2). A triangle organizes the data by evaluation, looking at all years at the same age. For example, in this triangle, the first column shows all years at 12 months of development, the second column shows all years at 24 months of development, and so on.

Because the years in the first column are all valued at 12 months from inception, you can make year-over-year comparisons, commenting that 2023 does show an improvement over 2019.

Actuaries review this data to determine loss development factors (LDFs) in order to develop currently valued data to ultimate levels.

Developed losses

Larry: Developed losses can get as tricky as a sidewinder caught in a horse’s pen unless we understand why we are looking at the development. If you are looking at the green-to-green, talking about how great you are doing, and your boss is looking at the developed losses and concerned with how much worse you’re doing, you could find yourself in a pickle. The green-to-green and currently valued losses don’t have enough information for the C-suite to know how much money to put aside once these claims have grown to full size. This is where the actuary magic comes in…

Melissa: Developed losses are a combination of the other two described loss data evaluations. Actuaries take currently valued data and apply the LDFs that were promulgated from the triangles using green-to-green data.

Actuaries use developed losses to understand the remaining future development for any given policy year. They select ultimate losses for each policy year, which incorporates the losses that have already been paid out as well as any future development. The future development is referred to as incurred but not reported (IBNR)

Because these developed losses are based on expectations and actuarial expertise, actual loss data may vary. However, for long-tailed lines of business, we may not know what those years will look like for 10 or 20 years (or sometimes longer). Developed losses are a good approximation of how each policy year is performing, and they can be used to compare year-over-year results when identifying trends.

In addition to each of these loss evaluations, actuaries tend to look at two separate trends: frequency and severity, and their combined result in a third trend: loss rate.

Common actuarial and safety calculations

Melissa: Frequency is the number of claims normalized by an exposure base (e.g., for auto liability, we can use auto count or mileage). The claim counts are developed (using a methodology similar to what is described above) and then divided by exposure in order to eliminate any variances due to growth or shrinkage in the company.

If frequency is increasing, it’s helpful to dig deeper. Was there a shift in risk at the company (e.g., entrance into new states or new job classifications)? Is there a particular cause of loss that is increasing?

Severity, or average cost per claim, is calculated by dividing the developed losses by the developed claim count. As with frequency, if severity is increasing it is important to identify why.

Loss rate is the combination of frequency and severity. It represents the developed losses normalized by the exposure and is used to help actuaries project future losses. Actuaries look at the past to predict the future, so they want to understand if there have been any shifts in these measurements in order to select a loss rate that will best represent the expectation for the next policy year.

Larry: Safety professionals should be familiar with the idea of rates if you’ve ever tracked your days away, restricted or transferred (DART) or lost time rates for the Occupational Safety and Health Administration (OSHA).² If the number you’re looking at doesn’t have something to normalize it, then it doesn’t really take into account what is happening in your work environment. Are we growing? Are we shrinking? Insurance carriers will often use payroll to normalize exposures, but the home office numbers often look weird compared to all other locations. Headcount, vehicle count, customer count, or product count may be more effective normalization entries.

Benefits when actuaries communicate with safety professionals

Larry: If you understand these actuarial development numbers as a safety professional, you will be able to have a more effective conversation regarding the development factors. Did you initiate a new fleet camera program that has already reduced or eliminated several claims that you might have paid for in the past? Did you add an intensive return-to-work program with increased communication where you are seeing improved outcomes on your workers’ compensation claims? Did you add fire and water monitoring systems to your buildings to ensure early response and minimize damage? Each of these initiatives may have an impact on claim experience, and we can demonstrate confidence that our new programs will reduce development versus the previous outcomes.

Melissa: Actuaries make selections in their analysis based on what they see in the numbers, and they sometimes react more quickly to adverse trends compared to favorable ones. Safety professionals may be able to provide qualitative context around changes seen in the numbers.

The qualitative information is as important, if not more, than the quantitative. If one of the above-described trends is increasing, that may not necessarily point to negative outcomes. There may be internal changes happening at the company that could result in a shift in trend.

It’s important for actuaries to understand the introduction of safety initiatives or changes in training and onboarding happening at a company so they can reflect it in their analysis. In a silo, an actuary may see a decrease in frequency or severity as a fluke and continue to consider a longer experience period in their selections, potentially overstating the result.

In conclusion

Conversations between safety professionals and actuaries are mutually beneficial for both parties.³ Safety professionals can gain insight into metrics that may help focus their efforts on value-added initiatives. Once those initiatives are implemented, actuaries can understand shifts they see in the trends in order to make more informed selections.

Even though safety professionals and actuaries may speak two different languages, they have similar goals to improve a company’s safety and protect the balance sheet at the same time.

¹ They also tend to use a lot of terminology that is foreign to others. For assistance in translating some of the terms used in this paper, refer to this article: https://www.milliman.com/en/insight/a-beginners-guide-to-the-casualty-actuarial-language (accessed September 22, 2023).

² U.S. Bureau of Labor Statistics. Injuries, Illnesses, and Fatalities. Retrieved September 24, 2023, from https://www.bls.gov/iif/.

³ Especially during a happy hour!