Consider the impact on allocation systems that are not designed to respond to the guaranteed cost structure. Creating an allocation system requires a substantial amount of time and resources, as well as buy in from employees and managers at all levels throughout the company. In the short term, guaranteed cost removes incentives for employees to concentrate on preventing losses. Companies also do not have an opportunity to benefit from exceptional outcomes. Guaranteed cost involves a significant investment of cash and takes money out of the organization s coffers that may be better used to support other operations.
Flexibility offers alternatives that complement the specific needs of a risk management program.
This is particularly important in the ever changing area of workers compensation. When we had retrospective rated programs, the focus was on accurate reserve setting. A lot of time and energy was spent reviewing reserve levels. Under our current large deductible program, the focus has changed from reserve analysis to claims management and loss prevention. We now spend our time creating an environment that will ultimately reduce the frequency and severity of claims.