Allocation & Chargeback Systems That Drive Results & Accountability

Andy Steinbach – Director, Risk Finance, Yum! Brands

Susan Pino – Director, Deloitte Consulting

Your Panel Today

Susan is a Director in the Casualty Actuarial practice of Deloitte Consulting LLP in Washington, D.C. She is anAssociate of the Casualty Actuarial Society, a Member of the American Academy of Actuaries and an Associatein Risk Management. Susan has twenty five years of casualty actuarial experience in a number ofproperty/casualty lines of business and provides services to a wide range of clients including insurancecompanies, reinsurance companies and self-insured entities.

Andy Steinbach Andy Steinbach is the Director of Global Risk Finance for Yum Brands, Inc.

During his 15+ year career in the insurance and risk management fields he has held positions in claims, lossprevention, corporate security, captive management and insurance placement. During the last 8 years he hasworked extensively in the international risk and insurance areas. He is a frequent lecturer at industryconferences.

Yum Brands develops, operates, franchises, and licenses a system of restaurants under the KFC, Pizza Hut andTaco Bell brands. The company operates ~ 39,000 restaurants in 125+ countries and territories.

Susan R. Pino

Introduction to Allocation & Chargeback Systems

• Quick definition

• Is there a difference between an allocation and a chargeback program

• Objectives for the Program• Incentivize Behavior at the division / region / location level

• Spread Cost across the US Subgroups

• Considerations• Ease of Use

• Sustainability

• Flexibility

• Objective and observable results

The Trade-offs• Easy versus Accurate

• Incentivizing versus Spreading Cost

• Fair versus Accurate Allocation Methodologies

Implementation

Introducing the Program:Evolution of Loss Impact

LossLevel

Time

Initial adoptionof allocation

Potential Unraveling of bad behavior

Implementation of other tools

Steady State

Communication Plan• Identify internal parties are responsible for reporting or analyzing information

• Legal

• Accounting

• Risk Management

• Commercial Unit leadership

• Be certain to involve all stakeholders in the selection of methodology

• Introduce tools that support success

• Safety

• Return to work programs

• Case management

• Draft clear communication of allocations so that methodology is self-evident or at least very easily understandable in context

• If you get too many questions, revise

• If possible, send as a group of responsible managers (e.g., send jointly with accounting and business analysis teams)

• Consider training in advance of communication

• In person

• Webinar

Scorecards and Reporting

• Must support goals and should clearly align with objectives

• Should incentivize positive behavior• Do you always reward improvement or do you prefer sustained excellence

more?

• What do you do when financial impact of behavioral changes has become unapparent?

• Continue?

• Change?

• Do not over-complicate scorecards or reports

• Focus on Identified Key Performance Indicators

• Integrate within RMIS systems if feasible

Common Objections• “I can buy my own insurance…” (especially from non-U.S.

stakeholders)• “…cheaper.”

• “… at a lower retention.”

• “This is larger than last year’s allocation.”• Change can be worse than being unaware of long-time overcharging

• “We need this allocated by…”• “…Country.”

• “…Legal Entity.”

“No charges under $X,000 will be booked.”

SampleMethodologies

Selection of Formula/Methodology• Consider the things discussed above, weighing the costs and benefits of:

• Simplicity

• Accuracy

• Fairness

• Do we have available data to support the methodology?

• Allocation and charge-backs could be identifiable at varying levels of the organization

• Commercial Unit

• Business Unit

• Region

• Country

• State / Cost Center

• Plant / Site

• Does the methodology incentivize behaviors?

• Positive

• Negative

• Is it easy for internal clients to understand?

• Who are they?

• How much training should they want or need to understand?

• What % of their annual budget is this?

• Consider prototypes and test to ensure goals are met and will be with repeated use

Sample Methodologies Considered

12

Methodology Advantages Disadvantages

Exposure Based • Simple• Reflects relative exposure to

claims

• Not responsive to claims experience

Experience Rating • Accurate• Considers Exposure and

Experience

• Complex• Lags actual results

Flat Frequency Charge • Responsive• Relatively simple

• Results can fluctuate from year to year• Less responsive to exposure and

exposure changes; responsive to actual experience

• May not collect full funding estimates

Hybrid (Case Study) • Balances stability and responsiveness

• Can be adjusted annually

• A bit more complex

Methodology #1: Exposure Based AllocationFacility Patient Days

Occupied

Beds (Patient

Days / 365)

Outpatient

.00005

ER Visits

.0002

Deliveries

.0325

Surgeries

.006

Home

Health

.00005

Employed

Physicians

Total Equiv

Units

Territory

Modif ication

Modified

Equiv Units

Percent

Allocation

1 12,099 33.15 49,704 13,060 430 2,085 - 8 72.73 0.50 36.37 0.66%

2 7,865 21.55 38,682 21,877 356 1,646 - 0 49.30 0.75 36.98 0.67%

3 8,530 23.37 50,440 17,584 205 1,809 23,655 5 53.11 0.40 21.24 0.38%

4 20,625 56.51 80,297 12,580 137 4,305 12,961 6 99.97 0.60 59.98 1.08%

5 3,116 8.54 14,763 4,440 215 817 6,827 4 26.39 1.10 29.03 0.52%

6 38,502 105.48 85,371 26,178 280 10,636 - 18 205.91 0.60 123.54 2.23%

7 14,203 38.91 47,474 12,094 367 4,970 - 5 90.45 0.08 6.78 0.12%

8 5,289 14.49 48,442 9,345 - 1,091 2,920 5 30.47 0.70 21.33 0.39%

9 10,459 28.65 45,660 13,225 170 2,390 - 12 65.45 0.50 32.72 0.59%

10 45,016 123.33 181,166 34,384 1,010 7,439 - 45 261.73 1.10 287.90 5.20%

11 13,437 36.81 34,461 14,298 439 2,500 - 6 76.66 1.10 84.33 1.52%

12 8,140 22.30 101,443 8,381 - 4,281 6,843 11 66.08 0.90 59.47 1.07%

13 18,083 49.54 106,636 29,740 904 6,642 4,331 6 136.27 0.70 95.39 1.72%

14 17,175 47.05 65,313 21,719 627 4,040 23,609 4 104.46 0.40 41.78 0.76%

15 29,364 80.45 244,537 27,368 1,115 7,519 - 41 220.50 0.50 110.25 1.99%

16 58,280 159.67 246,370 35,132 521 13,756 20,246 26 305.50 0.60 183.30 3.31%

17 3,307 9.06 50,155 9,346 292 2,111 - 5 40.59 0.50 20.30 0.37%

18 11,232 30.77 36,491 10,425 547 3,319 9,474 0 72.85 0.75 54.64 0.99%

19 8,515 23.33 67,828 9,676 505 2,823 - 10 72.01 0.50 36.00 0.65%

20 8,638 23.67 26,190 15,226 738 1,615 2,874 1 62.84 0.40 25.14 0.45%

21 26,129 71.59 146,830 14,560 367 6,295 - 16 147.54 0.90 132.78 2.40%

22 54,185 148.45 239,296 24,189 281 8,492 7,612 33 258.72 0.90 232.85 4.21%

Methodology #2: Experience Rating Formula

Sample Company @6/30/11Premium Allocation of the 2012-2013 Fiscal Year

Other DepartmentsDevelopment of Credibility Weighting & Initial Premium Allocation

Budgeted Ultimate Cost Appropriated

Expenditures Loss Per Funding Credibility Initial

FY FY 1,000 of Indicated Implied FY Weighted Premium

Division Code Division Name 2006-2010 2006-2010 Expenditures Relativity Credibility 2012 Relativity Allocation

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

11 Senate 9,809,356 0 0.00 0.000 3% 1,894,100 0.972 4,032

12 House of Representatives 19,158,197 0 0.00 0.000 4% 3,334,900 0.963 7,032

13 Legislative Printing 3,801,424 0 0.00 0.000 2% 694,500 0.983 1,495

14 Legislative Research & General Counsel 33,192,602 0 0.00 0.000 5% 7,209,100 0.946 14,928

15 Legislative Fiscal Analyst 12,289,414 0 0.00 0.000 0% 27,500 0.997 60

16 Legislative Auditor 13,460,053 0 0.00 0.000 4% 3,217,300 0.964 6,789

20 Courts/Judicial Branch 615,303,266 519,677 0.84 0.491 23% 126,006,200 0.884 243,997

710 Community & Culture 116,889,720 95,417 0.82 0.474 10% 23,725,300 0.948 49,258

9990 Heber Valley Railroad Associations 8,500,000 34,687 4.08 2.370 3% 1,600,000 1.035 3,626

9991 Utah State Fairparks 42,500,000 134,208 3.16 1.834 6% 8,300,000 1.049 19,057

9992 UCAN (Utah Communication Network) 21,500,000 0 0.00 0.000 4% 4,800,000 0.956 10,044

Total 10,711,898,237 18,442,237 1.72 1.000 2,445,270,580 5,375,730

Projected

Premium Per

Reserve Study

(55%

Confidence

Level): 5,354,175 Off-Balance: 21,554

Selected

Combined

Loss Rate: 2.19

Considerations for Chargeback Systems• Per claim charge

• Medical Only

• Indemnity

• Incident Only

• Appropriate timing/frequency of the charge

• One time charge

• Charge when claim converts from medical only to lost time

• Daily open charge vs. bucketed charges when a claim is open 30 days, 45 days, 90 days, etc.

• How do you strike the right balance in the methodology between the following?

• Per claim charges

• Exposures (such as payroll, sales, units, etc.)

• Loss history

• How many years are included in the loss history?

• Excluding outliers?

• Late reporting penalties

• Incentive “bonus” based on performance against goals

• Lower lost time claim counts

• Improved return to work

• Percentage of annual costs recouped by chargeback

• Varying the charges by business unit, locations, etc.?

Methodology #3: Flat Charge for Frequency(Adjustment for Severity)

Expected Initial

Five Year Number of Average Large Claims Cost per Frequency Severity Severity Indicated Final

US Subgroup Losses (1) Claims Severity Losses FY13 Claim Charge Mod Charge(2) Charge (3) Off-Balance Allocation

1 423,000 174 2,431 1 35 500 17,400 1.007 1.012 17,610 0.98 17,258

2 127,568 56 2,278 2 11 500 5,600 0.944 0.954 5,341 0.98 5,234

3 56,023 12 4,669 0 2 500 1,200 1.934 1.934 2,321 0.98 2,274

4 89,321 35 2,552 0 7 500 3,500 1.057 1.057 3,700 0.98 3,626

- -

- -

- -

- -

- -

12 1,034,099 347 2,980 3 69 500 34,700 1.235 1.250 43,360 0.98 42,492

13 765,297 295 2,594 1 59 500 29,500 1.075 1.080 31,851 0.98 31,214

Total 5,247,841 2,174 2,414 14

Notes: (1) Limited to $50,00 per claim

(2) No. of Large Losses x .005 + Severity Mod

(3) Frequency charge x Severity Charge Factor

Case Study: A Chargeback System & Scorecard

Option 1 Charges (total charges)

Medical Only = $4,041

Lost Time less than 31 days =$20,203

Lost time 31 days or greater = $60, 608

Option 2 Charges (total charges)

Medical Only = $4,172

Lost Time less than 8 days =$12,515

Lost time 8-30 days = $29,202

Lost time 31 days or greater = $62,576

Potential Exposure Charge

Expected Annual Count

Expected12/31

Actual Difference Cost Savings (or increase)

Medical OnlyLT < 8 DaysLT 8-30 DaysLT > 30 Days

370493652

247332435

231672410

(16)34-

(25)

(66,752)425,510

-(1,564,400)

Total 507 338 332 (7) (1,205,642)

A. Total Expected Charge: 10,010,262B. Expected Savings to date: $1,205,642C. Percentage Savings 12%

Case Studies

GLOBAL PORTFOLIO THREE

MAJOR

BRANDS

VERSATILE

OWNERSHIP

EMERGING

MARKET LEADER

• 13,000 +Restaurants

• ~60% Operating Profit

• 42,000+ Restaurants

• 130+ Countries

• Franchise

• Company

Yum! Business Model

Risk Management Philosophy

Focus on Loss Prevention & Mitigation

“Skin in the Game”

Maximize Cash Flow, whileProtecting Balance Sheet

• Company Culture

• Senior Management Commitment

• Supported by Robust Resources

• $5 to $25 Million Retentions • Incentives to prevent/mitigate losses• Operating divisions own their losses

• Do Not Trade Dollars w/ Ins. Co.• Aggressively Manage Claims • Risk transfer to Mitigate Catastrophic • Claims

Utilize a Global Master Control Program for P&C Exposures Self-funded Losses Represent ~75% of Total Cost of Risk

Yum! Operating StructureCompany structure has three primary operating divisions

• China division:

• ~ 7,000= restaurants (majority company controlled)

• International division:• ~ 15,000 restaurants (~ 90% franchised)

• ~ U.S. division:• ~ 15,000+ restaurants (~ 90% franchised)

Allocation Philosophy

• All insurance related expense associated with each operating division allocated to that division (fixed cost + actuarial forecast)

• Majority of expense is for self-funded claims

• Self-funded claims forecast (expense) trued-up twice a year

(Q2 & Q4) utilizing third-party actuary (Deloitte)

• Each division has flexibility how they allocate expense across restaurants: recorded on P&L as Actual = Plan

• Actuarial adjustments booked at division HQ level

Restaurant Level Chargeback System

Chargeback system designed to incent safety & post loss behaviors

Chargeback:

Team member injury debits Med Only +$1,250, Lost Time +$5,000

(P&L credits - controllable profit; non-CA)

PPO credit -$250 credit

Same Shift reporting credit -$750 credit

Return to w ork credit </=7 days -$3,000

8-14 days -$2,000

15-30 days -$1,000

Customer injury debits (controllable profit) GL +$2,000 , AL +$2,000

Injury Free Incentives:

Team members Various prizes

Restaurant Managers 1Q -$400, 2Q -$600, 3Q -$1,000, 4Q -$2,000

(P&L credits - controllable profit; non-CA) Potential $4,000 credit for full year

Example - U.S. Division Chargeback System

• Utilizes a carrot / stick approach• Designed to incent controllable behaviors (accident frequency & certain post-loss actions)• Not intended to reflect ultimate severity of each claim (hold claims management team accountable for claims outcomes)

• Credit / debit adjustments impact restaurant P&L (basis for manager’s bonus); reversed at division level consolidation

Lessons Learned Watch Out Opportunity Correction

Be careful what you ask for -

incentives may have

unintended consequences

Setting chargeback too high resulting in

restaurants going outside claims process

and/or delaying reporting claims

Reduce chargeback to correspond

closer to avg. cost of claim &

rewarding prompt claims reporting

Allowing field to grant exceptions Allowing exceptions can creep into a

bureaucratic mess and reduce effectness

of system

Gain alignment with management on a

"No Exceptions, No Whining" policy

Restaurant performance not

aligned with above-restaurant

leadership and support team

performance goals

Different functions focused on different

actions

Everyone on the same page - Tie

restaurant chargebacks to KPI's and

Loss Prevention/Safety Manager's

performance goals

Chargeback system overly

complex and/or operators do not

feel they can control outcomes

Operators not clear on what behaviors you

are trying to incent

First: Simplify system; Second: Create

direct link between actions and

outcomes; Third: Consistency, do not

make frequent changes

Maintain consistency, but modify

appropriately

Restaurant manager received credit for

reporting claims within 24 hours, initiated

nurse triage for WC claims

Adjusted 24 hour credit to same shift /

prior to any medical treatment being

sought

Too complicated to administer Inconsistent application and/or operators

not utilizing system

Fully automate system

Introduction of a New Chargeback System: Case Study

• Charge for both Frequency (number of claims)

and Exposure (hours worked, payroll, etc.)

Frequency Charge accounts for 70%-100% of

the funding estimate and includes separate

charges for Med-Only claims, Indemnity (lost

time) claims, and Indemnity claims reaching a

certain threshold of lost-time days

Exposure Charge accounts for 30% of the

funding estimate and is currently calculated

based on % of total hours worked

• An additional 10% increase is included in the

per claim charge to account for potential

improvement in experience. This only

impacts the Frequency Charge (70%) and will

therefore not completely cover a 10%

improvement in claims experience

• Lost time charges based on ‘days of lost time’

• Allocation or ‘Charge Back’ applied at the cost

center level

• Minimum charges ensure that the total charge

is at least $X per cost center

• Option 1 Charges (total

charges)

Medical Only = $4,041

Lost Time less than 31 days

=$20,203

Lost time 31 days or greater

= $60, 608

• Option 2 Charges (total

charges)

Medical Only = $4,172

Lost Time less than 8 days

=$12,515

Lost time 8-30 days =

$29,202

Lost time 31 days or greater

= $62,576

• Exposure Charge

Score Card Example

Expected Annual Count

Expectedc 12/31*

Actual Difference Cost Savings (or increase)

Medical OnlyLT < 8 DaysLT 8-30 DaysLT > 30 Days

370493652

247332435

231672410

(16)34-

(25)

(66,752)425,510

-(1,564,400)

Total 507 338 332 (7) (1,205,642)

26

Functional Area/Cost Center: Customer Care Policy Period: 12/13 Valuation: 12/31/12

I. Frequency: Claim Counts

A. Total Expected Charge: 10,010,262B. Expected Savings to date: $1,205,642C. Percentage Savings 12%

Actuarial Considerations

Actuarial and Other Considerations

ALAE

• Initially combined with loss in calculation

• Could subsequently separate out

ULAE/other fixed costs (i.e. excess insurance)

Behavioral Credits and Charges

Capping

• Limit penalty for large losses by capping losses in allocation

• Determine cap (excess of $X)

• Determine who will be responsible for the excess amounts (i.e. remain at

Corporate, divisions absorb equally, etc.)

Minimum Charges

Monitoring

Data Availability