Unrecognized Costs of Risk

Let me quote from an article written for the French journal SECURITE -Revue de Preventique, No. 16, October 1994, by risk management consultantJacques Charbonnier:

The indirect cost of industrial accidents to workers represents sizable,even considerable, amounts Ä figures too important to leave uncalculated.For that reason, in France, a regulation requires the making of "anestimate of the indirect cost of the work-related accidents and illnessessuffered by employees of the establishment (with indication of the method ofmaking the estimate)."

Doesn't that strike you as eminently sensible? And it is mandated by law!Yet how many U.S. risk managers do it? Not many; in my experience, hardly any;yet how can you know your cost of risk if you don't estimate indirect costs? Itmay be neither easy nor accurate, but an informed estimate is certainly betterthan ignoring the matter.

It's hard to generalize on how to value indirect costs because they varyboth with the firm and with the type of loss. That is why the French regulationasks for the method used to make the estimate.

Heinrich's 4:1 ratio of hidden costs to direct costs of workers compensationis well known. Other studies have shown other ratios, but all agree that hiddencosts are not only substantial, but usually greater than direct costs.

Factors that Heinrich included among the hidden costs were:

  1. Lost time of injured worker.
  2. Time lost of other employees who stop work to help.
  3. Executive time preparing reports and training a replacement.
  4. Damage to machines or other property.
  5. Continued wages of employee who can not work at full potential afterreturn.
  6. Costs from excitement or weakened morale.

Some years ago, Travelers studied collision costs of a trucking line. Hereare the indirect (uninsured) costs it found from one accident:

  1. Loss of profits on damaged cargo.
  2. Emergency supplies: flares, extinguishers, etc.
  3. Communication expense for police and medical aid.
  4. Cost of guarding cargo.
  5. Salary and expense of sending company representative to accident scene.
  6. Wages for moving cargo to relief trailer.
  7. Wages for relief driver and vehicle expense from relief terminal to sceneand possible return to relief terminal.
  8. Wages of second relief driver and vehicle expense to scene and movingdamaged trailer for repairs.
  9. Wages and vehicle expense of sending third relief driver to scene andconveying damaged tractor to shop.
  10. If cargo returned to origin, line haul cost on accident vehicle fromorigin to accident.
  11. Additional telephone and communication expense.
  12. Fines and costs.
  13. Disruption of schedules; expense of emergency substitutions.
  14. Delay of freight en route, increasing exposure of damage claims fromdelays and loss of good will.
  15. Cost of unloading relief trailer at terminal, sorting, checking forshortage and damage and reloading.
  16. Clerical costs of issuing reports.
  17. Salary and expense of employees at hearings, trials, etc.
  18. Loss of use of damaged equipment.
  19. Accelerated physical depreciation of equipment following accident.
  20. Possible increase of insurance rates.
  21. Loss of employee good will.
  22. Loss of customer good will and business.
  23. Loss of public good will.

If the driver had been injured or killed, there would have been many moretypes of indirect costs.

Ideally, we should be able to account for all these costs, but this ispolitically difficult. A partial approach has been used by government agencieswho account for "elements of production-accident cost." Factorsconsidered are:

  1. People
    a. Total comp benefits
    b. Wages and medical costs paid during disability in addition to compbenefits
    c. Time lost on day of injury and subsequent days
    d. Time spent at reduced output
  2. Machinery, material, equipment
    a. Cost of repairs or replacement
    b. Lost production time

Obviously, this is a critically important subject, about which not enoughhas been written. Certainly its importance calls for a considerable effort byeach company to quantify its own indirect costs of losses of all types.

Copyright © 1996 by David Warren
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