Managing Risk in the Tail
There are many definitions of risk, with most coming pretty close to each other. Interestingly, most all of these definitions put “risk” well beyond the point of “expected losses” on the actuarial loss curve (see graph below).
Focusing only on the downside of risk for the moment, are expected losses and those that fall to the right of the “expected” loss point really “risks?” If risk is the effect of uncertainty on objectives, then by that definition, “expected losses” would not be materially “uncertain;” they would be “expected” (though not certain).
This dichotomy has perplexed many risk professionals — especially those who lean into the traditional insurable risk realm, as these sources of loss are the primary focus of most of their responsibilities.
All good then, as that is what they were hired to do; a very necessary function for the successful operation of organizations. And yet this may be the one thing that limits the influence and in some cases the upward mobility of many traditional risk managers. After all, senior managers are typically most concerned about the unexpected and uncertain potential for disruption to the organization, its strategy and its plans that defined success.
As one CEO I worked for would say: “tell me what I don’t know.” An understandable interest since the CEO is the ultimate accountable person for the successful achievement of the plan of the organization he or she leads.
It is unlikely that expected losses will prevent the successful execution of operational or strategic plans, assuming these losses have been accounted for in budgets or transferred to others through insurance or contract. Now, budget shortfalls do occur and some claims may not be paid under certain insurance or contract conditions, but these are typically one-off variances that should be well within risk appetite and thus usually wouldn’t prevent accomplishment of most objectives.
So the obvious questions are: 1] how does your organization define risk and is it the definition that all stakeholders understand, agree upon and can manage to; and 2] where on the loss curve do you want to manage risk to?
Other questions might be, for example, do you assign more importance to likelihood or impact? I would suggest they are not of equivalent import and get their relative importance from a well-defined risk strategy, appetite and the risk culture that undergirds it.
Another question that quickly becomes critical is: how far out on the likelihood axis may be relevant to your risk strategy? This is the ultimate question that will define where you focus along the x-axis (likelihood or frequency), where resource needs are, the level of sophistication of tools and techniques necessary to manage risk effectively etc.
I urge you to get your key risk stakeholders together and vet these issues to ensure you have the right priorities and focus for managing risk within your organization. Absent this, you’ll be flying blind along a curve that presents an infinite set of outcomes. Can you afford to fly blind in the face of the potential of catastrophic uncertainty?
R&I: What was your first job?
It was back with Aetna in 1979. The area I worked in designed forms for use on new computers. It was insurance-related work but not underwriting. This work was the beginning of Aetna’s move to major automation.
R&I: How did you get your start in the business?
I moved around Aetna in various internal consulting positions and then completed the three-course ARM program. I had applied for a risk management position at Aetna in 1987 and was not selected. However, the person they hired to handle risk management left within a year and I reapplied. I guess due to my perseverance, they gave me a chance and I got the position. Best luck I have had in my career.
R&I: What emerging commercial risk most concerns you?
I guess at the top of the list now is cyber risk. Like many risk specialists I’m trying to figure out its impact to our operations. For us, we think the issue would be if someone was able to get in and close our systems down for a long period of time. Are we prepared for a cyber attack that closes our system down for a two- or three-week period?
R&I: Where do you think the risk management community is providing its most vital function?
I think the risk management community is better at elevating key risk issues in our respective companies and making sure that these risks are being reviewed and are known by senior management.
R&I: What are some of those key issues?
Taking a more holistic look at risk, for one thing. What will the impact be if a couple of non-related events happen at the same time, for instance? Like, if you have a tsunami at one site and a major fire at another site and they are simultaneous events. This helps to address catastrophic or “tail events” that could occur outside of the three standard deviations from the mean. It provides a good review of high CAT, very low-frequency events. These are the “black swan” events that have not been assessed before an event like 9/11.
Through RIMS, risk specialists are willing and able to share a lot of experiences. … At one point, my organization was looking into an international travel policy. I was able to go to two chapter contacts, including a former boss of mine. They gave me a wealth of information I used prior to approaching our broker to see what type of program would work best for us.
R&I: What surprises you most about the way the risk management and insurance industries have changed over the last few decades?
For me personally when I first started in the job some 26 years ago, the business was very much insurance-focused. Insurance represented 85 to 90 percent of my job and that was the foundation of everything around risk. Now, it encompasses only 10 to 15 percent. I’m being asked to get into enterprise risk management and contract work, as well as involvement in different aspects of the company, such as supply chain and cyber.
R&I: What are some of the latest happenings at the Spencer Educational Foundation where you are a director?
The Spencer Educational Foundation does a lot of work with students and younger risk professionals trying to attract these younger folks into the risk profession. Spencer also has a great program that I plan to utilize next year where it grants up to $4,000 to bring in interns from local universities to show them how the risk management function works at your company. These students get a great, first-hand experience in the working world and get to make many contacts that can lead to work when they are done with college.
R&I: Is the contingent commission controversy overblown?
That’s a good question. My opinion is there should be complete transparency around all compensation received by brokers, then we as the buyer can determine whether it’s appropriate or not. There can be the appearance of a conflict of interest when the broker is being paid by the insurer as well as by the buyer when there is no disclosure.
“That unpredictability [of risk management] makes every day exciting.” — Rick Roberts, director, risk management & employee benefits, Ensign-Bickford Industries
R&I: What is the riskiest activity you ever engaged in?
When I was younger I used to jump off a cliff, 65 or 70 feet down, at an old quarry in Southern Connecticut, which when I look at it now seems kind of stupid. But I might try some skydiving!
R&I: What have you accomplished that you are proudest of?
Going back to school to get my MBA as an old guy of 52 at the University of Hartford.
R&I: What is your favorite book?
“Start With Why” by Simon Sinek. He was a keynote at RIMS in L.A. two years ago. It’s a business book about decision-making. It forces you to ask the question “why?” “Why” customers buy versus “what” they buy. It talks about how we approach business situations to keep customers happy and coming back.
R&I: What is your favorite drink?
Blue Goodness. It’s a health drink made of a bunch of different berries. It’s a really good one!
R&I: If the world has a modern hero, who is it and why?
The folks that appeal to me as heroes are golfers such as Phil Mickelson, Jack Nicklaus and Greg Norman. They’re on full display and the way they behave when they fail or succeed is impeccable, both in sports and all the different businesses they still are running today.
R&I: What about this work do you find the most fulfilling or rewarding?
The diversity of the work and the fact that no two days are ever the same. That unpredictability makes every day exciting.
R&I: What do your friends and family think you do?
They’re beginning to understand the risk management function because of the publicity our work has received. Risk management seems to be seen in a very favorable light these days. People kind of get it when you say you’re involved in managing risk now because they understand the importance of loss control and the benefit of preventing injuries.
The Promise of Technology
The field of workers’ compensation claims management seems ideally suited as a proving place for the power of technology.
Predictive analytics in the hands of pharmacy and medical management experts can give claims managers the data they need to intervene in troublesome claims. Wearables and other mobile technologies have the potential to give healthcare providers “real-time” reports on the medical condition of injured workers.
Never before have the goals of quick turnaround and transparency in managing claims appeared so tantalizingly achievable.
In the effort to learn more about technology’s potential, in September, Risk & Insurance® partnered with Duluth, Ga.-based Healthcare Solutions to convene an information technology executive roundtable in Philadelphia.
The goal of the roundtable was to explore technology’s promise and to gauge how advancements are serving the industry’s ultimate purpose, getting injured workers safely back to work.
Big Data, Transparency and the Economies of Scale
Integration is a word often heard in connection with workers’ compensation claims management. On one hand, it refers to industry consolidation, as investors and larger service providers seek to combine a host of services through mergers and acquisitions.
In another way, integration applies to workers’ compensation data management. As companies merge, technology is allowing previously siloed stores of data to be combined. Access to these new supersets of data, which technology professionals like to call “Big Data,” present a host of opportunities for payers and service providers.
Through accessible exchange systems that give both providers and payers better access to the internal processes of vendors, a service provider can show the payer the status of the claim across a much broader spectrum of services.
“One of the things I see with all of this data starting to exchange is the ability to use analytics to predict outcomes, and to implement workflows to intervene.”
–Matthew Landon, Vice President of Analytics, Bunch CareSolutions.
“Any time that we can integrate with a payer across multiple products such as pharmacy, specialty and PPO services, what it does is gives us a better picture of the claim and that helps us to drive better outcomes,” said roundtable participant Chuck Cavaness, chief information officer for Healthcare Solutions.
Integration across multiple product lines also produces economies of scale for the payer, he said.
Big Data, according to the roundtable participants, also provides claims managers an unparalleled perspective on the cases they manage.
“One of the things that excites us as more data is exchanged is the ability to use analytics to predict outcomes, and to implement workflows to intervene,” said roundtable participant Matthew Landon, vice president of analytics with Lakeland, Fla.-based Bunch CareSolutions, A Xerox Company.
Philadelphia roundtable participant Mike Cwynar, vice president of Irvine, Calif.-based Mitchell International, agrees with Landon.
“We are utilizing technology to consolidate all of the data, to automate as many tasks as we can, and to provide exception-based processing to flag unusual activity where claims professionals can add value,” Cwynar said.
Technology is also enabling the claims management industry to have more productive interactions with medical providers, long considered one of the Holy Grails of better case management.
Philadelphia roundtable participant Jerry Poole, president and CEO of Malvern, Pa-based claims management company Acrometis, said more uniform and accessible information exchange systems are giving medical providers access to see how bills are moving through the claims manager’s process.
“The technology is enabling providers to call in or to visit a portal to figure out what’s happening in the process,” Poole said.
Another area where technology is moving the industry forward, according to the Philadelphia technology roundtable participants, is mobile technology, which is being used to support adjustors and case managers and is also contributing to quicker return to work and lower costs for payers.
The ability to take a digital tablet to a meeting with an injured worker or a health care provider is allowing case managers to enter data and give feedback on a patient’s condition in real time.
“Our field-based case managers have mobile connectivity to our claims systems that they use while they’re out of the office attending doctor’s appointments, and can enter the data right there into the system, so they’re not having to wait until they are back at the office to enter critical clinical documentation,” said Landon.
Injured workers that use social media, e-mail and the texting function on their mobile phones are staying in better touch with those that are charged with insuring that they are in compliance with their treatment plans.
Wearable devices that provide in-the-moment information about an injured workers’ condition have the potential to recreate what is known in aviation as the “black box,” a device that will record and store the precise physical state of an employee when they were injured. Such a device could also monitor their recovery process.
But as with many technologies, worker and patient privacy also needs to be observed.
“At the end of the day, we need to make sure that we approach technology enhancement that demonstrates value to the client, while ensuring patient advocacy,” Landon said.
As payers and claims managers set out to harness the power of computing in assessing an injured worker’s condition and response to treatment, the cycle of investment in companies that serve the workers’ compensation space is currently playing a significant role.
The trend of private equity investing in companies that can establish one-stop shopping for such services as medical case management, bill review, pharmacy benefit management and fraud forensics has huge potential.
“Any time that we can integrate with a payer across multiple products such as pharmacy, specialty and PPO services, what it does is gives us a better picture of the claim and that helps us to drive better outcomes.”
— Chuck Cavaness, Chief Information Officer, Healthcare Solutions.
The challenge now facing the industry, one the information technology roundtable participants are confident it can meet, is integrating those systems. But doing so won’t happen overnight.
“There’s a lot of specialization in the industry today,” said Jerry Poole of Acrometis.
Years ago there was a PT network. Now there’s a surgical implant guy, there’s specialized negotiations, there’s special investigations, said Poole.
The various data needs to be integrated into an overall data set to be used by the carriers to help lower the cost of risk.
Securing Sensitive Information
Long before hackers turned the cyber defenses of major national retailers inside out, claims management professionals have focused increased attention on the protection of data shared across multiple partners.
Information security safeguards are changing and apply to what technology pros refer to “data at rest,” data that is stored on a particular company’s servers, and “data in flight,” data that is transferred from one user to another.
Mitchell’s Cwynar said carriers want certification that every company their data is being sent to needs to have that information and that both data at rest and data in flight is encrypted.
The roundtable participants agreed that the industry is in a conundrum. Carriers want more help in predictive analytics but are less willing to share the data needed to make those predictions.
And as crucial as avoiding cyber exposures and the corresponding reputational damage is for large, multinational corporations, it is even more acute for smaller companies in the workers’ compensation industry.
Healthcare Solutions’ Cavaness said the millions in loss notification and credit monitoring costs that impact a Target or a Home Depot in the case of a large data theft would devastate many a workers’ compensation service vendor.
“They’d be done in a minute,” Cavaness said.
The barriers to entry in this space are higher now than ever before, continued Cavaness, and companies wishing to do business with large carriers have the burden of proving that its security standards are uncompromising.
Workers’ compensation risk management in the United States is by its very nature, complex and demanding. But keep in mind that those charged with managing that risk get better results year after year.
Technology has a proven capability to iron out the system’s inherent complications and take its more mundane tasks off of the shoulders of case adjustors.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Healthcare Solutions. The editorial staff of Risk & Insurance had no role in its preparation.