Chargeback Program Design THE CARROT OR THE STICK
Chargeback Program Design THE CARROT OR THE STICK
Chargeback Program Design MELISSA DUNN RICHARD FRESE TOM FULLER VP & Managing Director Helmsman Management Services Principal and Consulting Actuary Milliman Manager, Risk Management Consulting Liberty Mutual Insurance
Objective Issues to consider when designing/revising a cost allocation system Case Studies
Current System What are currently doing to allocate costs? What’s working well? What’s not working well? Desired improvements?
Cost Allocation Goals Accounting accuracy Motivate behavior Motivate positive behavior (to reduce cost) Ø Reduce accidents Ø Minimize costs after accidents
SIMPLE COST ALLOCATION ATTRIBUTES TIMELY EQUITABLE
Perfect System? Can I design the perfect chargeback system for my company? False Always tradeoffs
Initial Decisions • Who should be involved? • Competing interests? • Stakeholder concerns/priorities/perspectives?
Initial Decisions • • What cost components? How often to allocate? To what level will allocate? Prospective or retrospective?
Initial Decisions • Need to completely allocate costs? • Need to smooth results? • Reward productive behavior?
EXPOSURE ULTIMATE LOSS CLAIM COUNTS COST ALLOCATION STRUCTURE PAID LOSS INCURRED LOSS
Cost Allocation Structure Mix of claims and loss? Target specific behavior? ◦ Prompt claim reporting credit? ◦ Charge per TTD day? Target specific injuries? EXPOSURE ULTIMATE LOSS CLAIM COUNTS COST ALLOCATION STRUCTURE PAID LOSS TTD = Temporary Total Disability INCURRED LOSS
Cost Allocation Issues Motivates desired behavior?
Unique Situations & Challenges • • Divesting/acquiring business units Lack of historical experience Change in risk profile New Management
Advanced Considerations • More complex designs • Predictive analytics
SET OBJECTIVES MONITOR • Continue to assess needs and objectives • Revise system as necessary • Produce management / allocation reports • Continue to obtain feedback and “buy-in” • Identify needs and objectives • Evaluate current allocation system • Obtain “buy-in” from corporate stakeholders COST ALLOCATION PROCESS IMPLEMENT • Test system • Provide any necessary training • Develop management information reports • Design allocation reports DESIGN • • • Identify potential constraints Develop alternative designs Evaluate alternatives Select “best” system Obtain “buy-in” from corporate stakeholders
Case Studies
Q&A
Contact Information MELISSA DUNN VP & Managing Director RICHARD FRESE Principal and Consulting Actuary TOM FULLER Manager, Risk Management Consulting Helmsman Management Services Milliman Liberty Mutual Insurance Melissa. dunn@helmsmantpa. com 630 -791 -6189 richard. frese@milliman. com 312 -499 -5648 thomas. fuller@libertymutual. com 314 -205 -7525
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