|Title:||United States cost of risk as a percentage of sales with a breakdown for workers compensation and general liability for 2002 to 2011|
Start of full article - but without data
Cost of Risk as Percent of Sales
Workers Compensation General Liability
2002 X.XX% X.XX% 2003 X.XX% X.XX% 2004 X.XX% X.XX% 2005 X.XX% X.XX% 2006 X.XX% X.XX% 2007 X.XX% X.XX% 2008 X.XX% X.XX% 2009 X.XX% X.XX% 2010 X.XX% X.XX% 2011 X.XX% X.XX%
Note: Table made from line graph.
In terms of both employment and revenue, retail is among the largest contributors to the U.S. economy. Retail sales eclipsed $X.X trillion in 2010 and, with XX.X million employees, it is second only to health care.
The cost of risk for retailers is primarily a function of the large number of employees required to operate retail companies (resulting in workers compensation risk stemming from employee injuries) and the large number of consumers who regularly patronize retail establishments (and pose a general liability risk stemming from customer injuries). Insuring the physical premises of the retail locations and warehouses is another contributor to the cost of risk.
In total, based on a sample of some of the nation's largest retailers, the cost of risk for retailers averages nearly X.X% of sales. That percentage may seem small, but given the size of the industry, the annual cost of risk to retailers is a staggering figure: $XX billion. And since much of the retail sector is characterized by slim profit margins this can be highly damaging for business. For retailers targeting a X% profit margin--which is not uncommon--the cost of risk represents over XX% of the annual profits. Therefore, lowering the cost of risk can allow retailers to increase the bottom line without even increasing sales.
Workers compensation costs are far and away the largest component of the cost of risk (Figure X). These expenses alone (including lost work wages and medical expenses for injured employees) represent almost half of the total cost of risk. When we add in ancillary costs such as claims administration, state assessments, risk management and safety, the total cost of workers comp to retailers is more than half of the total cost of risk (approximately X.XX% of total sales).
General liability costs represent the second highest expense, accounting for about XX% of the cost of risk (approximately X.XX% of sales).
The actual cost of any one of these components may vary significantly from one retailer to another. The location of their stores and the nature of their operations can have a large effect. In addition, estimates based on our research capture only the direct cost of risk of retailers; the prices of products purchased at retail stores also include the cost of risk of designing and manufacturing the product and transporting the product to the retail store. Thus, the portion of a single dollar of sales that is associated with all forms of risk along the retail chain is undoubtedly higher than the amount gathered here from our sample of retailers.
The graph below (Figure X) shows how the workers compensation and general liability cost of risk has changed over the past XX years for a group of retail clients with more than $XXX billion in annual sales. As shown, retailers were successful in driving down their annual workers compensation costs from 2003 to 2007, but since then have experienced modest increases. General liability costs, however, generally kept pace with changes in sales through 2008, and have increased marginally since then.
[FIGURE X OMITTED]
Workers Compensation Drivers Retail claim frequency decreased by an average of X.X% per year from 2002 to 2011 as a result of several factors (Figure X). Perhaps most importantly, more retailers embedded safety programs and a safety mentality into their corporate structure. Combining this initiative with an increased use of light duty and return-to-work programs certainly lowered the costs. And there has also been a push for more "charge-back programs" (which allocate the cost of claims to the business units that produce them), investigations into potential fraudulent claims and the use of preferred healthcare providers.
The long-term decline in retail claim frequency is similar to declines seen in the overall workers compensation industry, in which the frequency of lost-time claims (those with a lost-wage component) declined by an annual average of X.X% from 2001 to 2010.
The average claim cost for retailers, on the other hand, increased by an average of X% a year over the past XX years. The moderate increases seen from 2002 to 2006 have been succeeded by sharply escalating costs since 2006. This, too, mimics the rise of average claim sizes throughout the workers compensation industry at large, where the average lost-time claim size increased by an annual average of X.X% over the same time period.
This rise is largely a function of both higher indemnity costs and higher medical costs--and it has been even more pronounced in retail. Its average indemnity costs increased by an annual average of X.X% from 2001 to 2010, outpacing the average annual increase in wages of X.X%. And average medical costs have increased by a stunning annual average of X.X% from 2001 to 2010.
[FIGURE X OMITTED]
Rising costs have not been distributed evenly, however. Due to differing state benefit structures, workers comp loss rates may vary significantly for different retailers. The result is that the compensation for the same injury depends on the state in which it occurs.
So while the average retail premium rate countrywide is $X.XX per $XXX of payroll, the highest average comes in California ($X.XX per $XXX) and the lowest in North Dakota ($X.XX per $XXX). Generally, states in the West have the highest average premium rates, driven by California, followed by the Northeast and the South. (Figure X)
It is not just location that matters, however. Specific categories of retailers also have differing costs. The premium rates for restaurants, bars, and nightclubs, for example, are much lower, on average, than the premium rates for grocery stores and furniture stores. In addition, there is wider variation in the premium rates from state to state for warehouse and mail-order retailers than for other retailers.
Another cost driver can be the nature of operations and products sold. In general, the more workers a retail company employs who lift heavy or bulky objects, and the more employees dealing with potentially dangerous equipment (such as meat cutters in a grocery store), the higher the workers compensation costs will be.
Lastly, of course, workers compensation costs are affected by the risk management and safety culture that exists at each retailer. And since this is the factor that companies can most easily take control over at their facilities, it would seem to be the one they should concentrate on to lower program costs.
Retailers can control their general liability costs to some extent by how they maintain their premises. Seemingly small factors--plowing the parking lot, keeping the floor clear of debris and stacking heavier items on lower shelves--can make a big difference. For most retailers, general liability costs consist of premises liability claims (such as slip-and-falls) and property damage claims (such as damage to vehicles in parking lots). Products liability claims such as food poisoning are passed on to the manufacturer where possible.
[FIGURE X OMITTED]
What retailers cannot control is what their customers wear (loose clothing may get caught in escalators, certain shoes may be more slippery) and how their customers act. And as with workers comp, location plays a large role.
General liability costs vary by state-and can even vary from jurisdiction to jurisdiction within a state. Notoriously litigious areas have higher claim costs, driven by both higher claim frequency and higher average severity.
Moreover, the reporting of general liability claims may also vary significantly over time even for an individual retailer. This can often be attributed to different third party claims administrators defining and "counting" claims differently; small general liability claims (such as small property damage claims where the customer is given a gift card) may be included in the claim data one year and not included the next.
Nevertheless, the general trend over time has been a reduction in claim frequency and an increase in the average cost per claim. But the average cost of approximately $X,XXX per general liability claim belies the fact that these injuries can be serious and lead to significant sums. From 2003 to 2009, the median award for a premises liability claim was $XX,XXX against retail stores and the median award for a products liability claim was $XXX,XXX for consumer products (Figure X).
The result is that when you go shopping, XX cents of every $X,XXX goes towards insurance. This sounds like a small amount to set aside in the piggy bank, but across the trillions of dollars spent at retailers each year, the total reaches $XX billion.
Amy Angell is principal and consulting actuary at Milliman, an actuarial and consulting firm based in Seattle.
Figure X: Costs of Risk Components
Workers Compensation XX.X% General Liability XX.X% Employment Practices Liability X% Claims Administration X.X% Other Insurance X.X% Property X.X% State Assessments & Fees X.X% Broker Fees X.X% Risk Management & Safety X.X% Collateral Costs X.X%
Note: Table made from bar graph.
Figure X: Cost of Risk as Percent of Sales
Workers Compensation General Liability
2002 X.XX% X.XX% 2003 X.XX% X.XX% 2004 X.XX% X.XX% 2005 X.XX% X.XX% 2006 X.XX% X.XX% 2007 X.XX% X.XX% 2008 X.XX% X.XX% ...