Risky business

It is an obvious fact that accidents cost money. However, what is not obvious is who knows exactly how much they cost and who pays? The answer, in short, is everybody: employers, employees, insurance companies and society as a whole.

Employers' liability insurance was not in force in the 1890s when one of the most common causes of accidents was boiler explosions. Although by the 1950s accident numbers had reduced considerably, the causes of accidents were still obvious and clear for all to see - unguarded machinery, dangerous working practices and a degree of disregard for employee safety. However, in the 21st century, although risk management performance has improved and accident rates reduced, we have EL insurance and a claims culture.

Nowadays the gains are less clear-cut, management requires justification for spending and savings must be demonstrated. However, preventing any accident is a job well done and, for the business, can lead to a saving of costs.

Long before an accident happens, brokers have a role as an intermediary in the truest sense, presenting a risk in the most honest way to the underwriter. It is about getting the client the best deal and also spotting hazards and their potential to cause accidents and claims. Brokers play a key role in highlighting what work needs to be done to reduce risk and prevent claims.

Brokers should understand insurers' interest in good risk management and help the client improve their performance. Equally, brokers would do well to understand the whole range of costs associated with health and safety failures - not just the cost of the premium.

Accident costs

In 1990, the government looked at accident costs for the first time. Firstly, it was unclear who was paying for accidents and, secondly, it was part of a plan to establish the business case for health and safety at work. At that time, the cost of workplace accidents and ill health to individuals was between £10.1bn and £14.7bn; for employers it ranged from £3.9bn to £7.8bn; and for society between £20bn and £31.8bn.

Other statistics from the Labour Force Survey show that each year there are around one million injuries in the workplace; 2.3 million cases of occupational ill health; 40 million lost workdays and 25,000 people forced to leave work through accidents or ill health at work.

The figures are patently large and difficult to relate to, not really reflecting the pain and suffering to individuals and the immediate cost to business of having an employee injured.

With the scale of the problem, the Health and Safety Executive developed its business case argument, the central thrust being that costs associated with accidents are not all insurable or recoverable.

Insurance protects the employer and provides appropriate levels of compensation for an injured employee, when their employer is found to be negligent. What businesses often overlook are the things insurance does not cover, including: carrying out investigations; loss of production or output because machinery is involved in an accident; overtime costs to replace lost output; agency labour to substitute people who are out of action; modifications to machinery following an accident; sick pay for an employee; and fines if you are in breach of the law after an accident.

It is estimated that the uninsured costs of an accident exceed insurance premiums by at least 10 to 1 and can be up to 30 to 1. However, if businesses manage risk and prevent accidents, there will be a direct impact on the bottom line and savings of uninsured costs.

For example, HSE research shows that a construction company's health and safety failures could account for up to eight percent of a tender price. Having control over health and safety and risk management means that costs can be trimmed, making the firm more competitive.

Similarly, for a transport firm, the cost of accidents is equivalent to 37% of profits or 1.8% of running costs - compelling figures that should cause any firm to sit up and take notice.

The HSE has been promoting this business case for many years but improvements have been difficult to prove or to track. Is the message getting through or being understood?

Counting the cost

Research from the HSE, entitled Perceptions of the Cost Implications of Health and Safety Failures, published this year, revealed that the majority of organisations are not concerned about the cost of accidents. Instead, the results suggested, more firms are likely to respond to issues such as moral obligations, potential legal exposure, external pressure from customers, insurers, staff morale, retention and recruitment. The findings also showed that 75% of small firms do not know what accidents are costing their businesses. Equally, they claimed that accident costs were not a problem based on the low incidence rate.

Conversely, larger organisations felt that the cost of accidents was a major business expense and numerous employers regard the cost of EL insurance to be a significant expense and are concerned about claims costs. A subset of companies in the report did carry out some accident costing exercises which showed that - across a total of almost 800 accidents - the average cost was £195, with individual costs ranging from a paltry £3 to a more ominous £21,000.

What businesses need to understand, and their brokers need to be reminding them of, is that the cost of insurance is driven by the cost of claims, even if they appear to be happening to somebody else and not them. All businesses have to manage risk and health and safety, as accidents will occur sooner or later. A good accident record may have come about by luck or good management but it needs to be maintained. The direct effect is that if everybody manages risk, premium levels will be stabilised.

However, while businesses worry about the cost of insurance and the headline-grabbing figures of employees getting high compensation payouts, they seem unwilling to identify the costs they have incurred in relation to an injured employee. These costs impact on the profitability of a firm directly and immediately.

More often than not, the spending of a few hundred pounds will save the cost of an accident. Buying a machine guard could reduce the chance of an accident for a certain number of employees and prevent the costs that come with it.

The factors - highlighted in the HSE's research - that are supposedly driving the health and safety agenda are largely intangible, how much are they really motivating firms to improve their risk management performance?

The cost of EL insurance was cited, however, is this really impelling businesses to make their workplaces safer? EL premiums amount to, approximately, less than one percent of payroll - a relatively small sum of money in the context of running a business.

Research shows that employers would take measures to reduce their EL premium only when it reached the level of three percent of payroll - still a long way off. So where is the pressure coming from to change health and safety behaviour?

It can not be the cost of claims, as the majority of small to medium-sized enterprises do not have many claims - perhaps one every three to five years, and sometimes longer - and it is the insurance company that pays the claim anyway.

What about so-called customer or supply chain pressure to change risk management practices? A major retailer will look at the quality management of its suppliers; a major car manufacturer would probably reject any component that was not perfect, and may stipulate a delivery schedule within a 15-minute window every day of the week. That is all feasible but the likelihood that they will question risk management or the number of accidents in the workplace is very small. One exception to this is the construction industry, where health and safety is an integral part of doing business. That aside, where exactly is the pressure coming from?

Driving the agenda

Businesses seem to be talking themselves into a cul-de-sac about what is driving the health and safety agenda. Customer pressure and maintenance of brand and image are intangible and uninsurable, yet they claim that these are impelling them to look at health and safety.

The insurance industry sees no evidence of this. Rather what is seen are the same problems time and again: bad training; poor supervision; and faulty or unguarded machinery and equipment. If it is truly customer pressure that is influencing companies, then they are either ignoring customers' interests in health and safety, or their customers are not asking the right questions.

To illustrate the issue, a man whose job included using a saw for cutting metal had been with a firm for only a few days when he had an accident resulting in 18 months off work. He was left with serious scarring on his arm, a permanent disability and some accompanying psychological problems. The firm was prosecuted for breaches of health and safety legislation and fined £5000.

He made a claim and the investigation revealed that the machine was minus a guard, that there were deficiencies in the training and supervision he received and all the related records were poor. The claim was virtually impossible to defend and was settled for £193,000 as the insurer was able to argue that the employee was 10% to blame. Following such a claim, the estimated insurance premium rise for a firm of that size and type would be £3000 to £4000. The firm had to pay out extra for its premium increase and a fine for contravention of health and safety but had no idea what other costs they had incurred as a result of the accident. The cost of the machine guard - a piece of curved plastic and a spring - that would have protected the man in the first place and avoided the whole sorry business was about £200.

Preventing accidents costs money; the consequences of accidents cost money - but it is obvious which cost is the easiest to bear.

- Phil Grace, Casualty risk manager, Norwich Union.

CASE STUDIES

Plastics firm:

- Had manual handling risk assessment and kinetic handling training in place.

- Supplemented with physiotherapy for those off work with musculo-skeletal disorders and back pain.

- Realised an 80% reduction in days lost and received a £12 return on every £1 invested.

Paint stripping firm:

- Employees at risk of skin contact and breathing in fumes.

- Hoist fitted to allow mechanical rather than manual loading and extraction fitted.

- Significant reduction in employee exposure to solvent fumes and notable reduction in solvent losses.

- Loading time reduced from 60 minutes to 20 minutes. Savings paid for the cost of the installation.

Food manufacturing:

- Finished product in glass jars was packed in loads of 1kg or 3kg, removed from a conveyor and placed on a pallet, involving lifting, twisting and stooping.

- Activity caused complaints and back pain.

- Scissor lift introduced that maintained the pallet at the optimum height for loading - no complaints since its introduction.

Food manufacturing:

- Self-adhesive tape manually placed round the edge of polystyrene trays and cut with a knife.

- Employees experienced discomfort, resulting in some upper limb disorders, plus the risk of cuts.

- Polystyrene trays replaced with pre-printed cardboard trays.

- Subsequently no complaints about upper limb disorders or cuts. Staff numbers reduced and total savings of £10,000.