Indirect-to-direct accident cost ratios

Presentations to management on the costs of worker injuries and illnesses can be attention getting and convincing, provided the data is plausible and can be supported with suitable references. Unfortunately, very little research and hard data exist to support the frequently used ratios of indirect-to-direct costs that appear in s ety-related literature. 

For decades, safety practitioners have used the ratio of indirect-to-direct costs of accidents to inform managements on total accident costs and to achieve improvements in safety management systems. The most commonly used ratio is 4 to 1, but the literature contains a wide range of ratios and an even broader range of methods for determining the ratios. Uniformly accepted computation methods to determine indirect and direct costs have not evolved. Differences in the systems utilized are substantial. 

More importantly, no published ratios are currently valid because the increase in direct costs from about 1995 through 2011—indemnity payments and medical costs— has substantially exceeded the increase in indirect costs. This chapter  

On the Practice of Safety, Fourth Edition. Fred A. Manuele. 

Shares the author s thoughts on a review made of selected data pertaining to indirect and direct accident costs. 

---

Statisticians may say they would like a larger sample from which to draw conclusions. Nevertheless, the data are significant. An excerpt from the report follows. Its substance is pertinent to the improbability of arriving at a universally applicable indirect-to-direct accident cost ratio. 

Indirect-to-Direct Accident Cost Ratios Uniformly accepted computation methods to determine indirect and direct accident cost ratios are not available. Differences in the systems utilized are substantial. More importantly, no published ratios are valid because the increase in direct costs from about 1995 through 2011 (indemnity payments and medical costs) has substantially exceeded the increase in indirect costs. This chapter presents a review of selected data pertaining to indirect and direct accident costs, shows computations made to update ratios resulting from the only plausible research located to give an approximation of what the current ratio of indirect to direct costs might be, comments on the inappropriateness of using additional sales needed to cover indirect and direct costs, and pleads for research to provide substantiated cost ratios. 

Computations in this chapter updating the Stanford study indicate that the ratio of indirect-to-direct accident costs is currently about 0.8 to 1. That ratio is given as an approximation. Safety professionals who use a 1-to-l ratio can be reasonably comfortable. This author recommends against using ratios for which there is no supporting data (4 to 1, 6 to 1, or 10 to 1, or higher). 

Direct and indirect costs are addressed in that report. Its Table 3 is titled Analysis of Accident Costs. Excerpts follow. Note that the ratio of indirect to direct costs diminishes as the cost of the benefits paid increases. Also, keep in mind that money numbers are in 1982 dollars. 

Fred A. Manuele, Accident Costs Rethinking Ratios of Indirect to Direct Costs, Professional Safety, 56(1) 39 7 (2011). 

U.S. Department of Labor, OSHA (2007), in an undated bulletin titled Safety and Health Management Systems eTool—Costs of Accidents says Studies show that the ratio of indirect costs to direct costs varies widely, from a high of 20 1 to a low of 1 1. Geige Safety Group provides OSHA Academy Course 702— Accident Investigation Recommendations (April 2010). They say If the indirect (uninsured) accident cost totals 160,000 and the direct (insured) cost is 40,000, the ratio of indirect to direct costs will be 4 to 1. ... 

H. W. Heinrich is the author of Industrial Accident Prevention A Scientific Approach. His presentation on the indirect-to-direct cost ratio... 

Analysis of the compiled data showed that the indirect cost ratio is affected by many variables. However, the report said Still, if the accident data are separated into two general groups, large and small claims, it can be seen that smaller accidents have a larger [indirect-to-direct cost] multiplier. ... 

The total of hidden costs for all claims was divided by the total cost for benefits paid, resulting in a 1.6-to-l ratio of indirect-to-direct costs. But the report cautions that the 1.6 ratio may be low because certain indirect cost data was omitted, such as OSHA fines and hearings and third party liability and legal actions, and the effect of accident costs on future workers compensation premiums. ... 

The total costs of accidents are often depicted as a pyramid, as shown in Figure 3.2.The pyramid depicts the direct costs to reveal obvious costs, as well as workers compensation claims, medical costs, and indemnity payments. Indirect costs, however, are less obvious if realized at all. Such costs include schedule delays, added administrative time, lower morale, increased absenteeism, and poorer customer relations. Studies have shown that the ratio of indirect to direct costs varies widely from as high as 20 1 to as... 

Figure 3-1 Ratio of indirect to direct costs of on-the-job accidents...

Studies have shown that the ratio of indirect cost to direct cost varies widely from 20 1 to 1 1. OSH A has shown that the smaller the cost of the accident the greater the direct to indirect cost ratio (see Table 9.7). Over many years I have always used a ballpark figure of around 5-10 for indirect cost to direct cost. There is little doubt that indirect cost can mount up quickly. 

Heinrich s empirical work showed a one to four ratio between direct and indirect or hidden costs (Heinrich, 1959). The implications of these figures are that significant economic benefits of safety work are overlooked. However, later studies of accident costs in Britain, Finland, Israel, Norway and USA, applying variations of Heinrich and later accident cost models, have come to other results. The ratio between direct/insured costs and indirect/ uninsured costs vary from less than one to over 10, see Rognstad (1993) for an overview. Differences in the applied methods and between industries and countries may explain the varying results. 

Other sources present indirect costs much more dramatically. Estimates range from an amount equalling that of the direct costs to as much as 200 times this figure (Ferry 1981). A conservative ratio is 3 1 that is, the indirect costs are expected to be, on the average, three times the direct costs. If for instance, an accident involves hospital costs and direct, reimbursable equipment losses of 1000, then at least 3000 in indirect costs should be added making up a total of 4000. 

---