Client-Level Financial Analysis

Originally published in PEO Insider. Reproduced with permission of the publication.

If you asked someone in the PEO space what he or she thought of actuarial science a positive response might be reserve analyses or accruals. A negative response might be collateral calls or rate increases. Naturally, the varied reactions stem from whether there is positive or negative news coming from the work of the actuary. Yet, one of the most helpful projects an actuary can perform for a PEO, eliciting either positive and negative reactions, is a client-level financial analysis.

The goal of this article is to show you what such an analysis does and why it’s important. Ultimately, you’ll see that it doesn’t take an actuary to perform this type of analysis although having one might save you some choice words.

What is a Client-Level Financial Analysis?

A client-level financial analysis shows the financial status of a PEO client over the entirety of partnership. It reflects all revenue and cost sources across the entire PEO business. When performed for every client, the PEO has the ability to understand its overall financial status, and, just as important, is able to drill down to see which business groups or sets of clients contribute more or less to the overall financial health of the PEO.

You should be forewarned that while this sounds straightforward, there are two main difficulties in performing this analysis. Data gathering and preparation is the biggest challenge. Often times, PEOs will be able to get one side of the balance sheet attributable at the client level, but not the other. For the analysis to work, both revenue and cost must be identifiable and accurate at the client level and for each separate time period. Without the proper matching of revenue versus cost over the same time periods, the resulting numbers and conclusions may not be accurate.

The second main difficulty is estimating the insurance-related liabilities. Workers’ compensation liabilities take years if not decades to fully settle. This would be more easily dismissed if such liabilities were a small portion of a PEO’s balance sheet, but often they are material, and as such their estimation plays a significant role in a client-level financial analysis. Overestimating workers’ compensation liability may lead to the conclusion that the PEO and its individual clients are not on solid financial footing, whereas underestimating the liability may lead to a more favorable but inaccurate perspective.

Why is this Important?

If you can get through the aforementioned difficulties, the benefit of having such information at your fingertips cannot be overstated. With such an analysis, a PEO can evaluate the performance of each individual business group or group of clients over time. This opens lines of sight that are only limited by the time and curiosity of PEO leadership. For example, the PEO can now quantifiably evaluate how the workers’ compensation program is performing over time and which segments of the client population is impacting that performance. Similarly, the PEO can now quantifiably evaluate which groups of clients are performing well in group health but not in workers’ compensation and vice versa. Considering client demographics like size, geography, industry, and distribution channel to the PEO opens even more ways to evaluate the PEO’s book of business. Say goodbye to ephemeral gut feelings and dated metrics and say hello to tangible concrete numbers on a client’s financial status.

One of the most rewarding parts of being in the industry is to help people get excited about making more informed data-driven decisions. A great example in this case is with a firm that had assumed for quite some time that providing price concessions was helping maintain their client retention levels, and minimize client churn. When the client-level financial analysis was conducted, they quickly looked into this assumption and to their surprise realized that the results were counter to that assumption. Clients that they provided price concessions to actually stayed a shorter time with them than those that they didn’t. Naturally, it opened up a new set of conversations around how to utilize such concessions but the veil had at least been mostly lifted from their eyes regarding these long-held practices.

Take-Away

While it does take some work to get the data prepared properly, which may warrant having an experienced in-house resource manage the process and/or seeking help externally, PEOs have found client-level financial analyses to be helpful in understanding the financial status of individual clients, segments of clients, and across the different business groups of the PEO. While benefits abound, the biggest benefit is the ability of a PEO to better understand every part of their business. That may be worth a few choice words along the way.