The Importance of a Good Insurance Agent in Keeping Workers Comp Rates Low

A good insurance agent looks out for their customers by knowing and caring about their clients business. Not being an insurance agent but seeing the good and bad of insurance over 20 years of cost containment and case management we see the after effect of good and not so good insurance planning. Below is an excellent article on experience modification rating and its impact on premiums. --- The SRS Group

Converting a Safe Workplace into Lower Workers' Compensation Insurance Premiums

Setnor Byer Insurance & Risk

In many states, including Florida, workers’ compensation insurance rates are set by the state, which means that regardless which insurance company ultimately provides the insurance, the rates remain the same. Therefore, unlike with other types of insurance, consumers are limited in their ability to go bargain shopping for workers’ compensation insurance. However, this lack of bargaining power does not necessarily mean that employers are powerless to reduce their premiums. There is one way employers can lower the cost of their workers’ compensation insurance: maintain a safe working environment.

Workers’ compensation insurance provides indemnity and medical benefits to employees who are injured on the job. Each time an employee files a workers’ compensation claim, the insurance company must make a payment on the claim. Needless to say, insurance companies prefer insuring safe, or safer, workplaces because there are presumably fewer claims to pay, thereby increasing the company’s profits.

Thus, in an effort to encourage employers to maintain a safe working environment and to reward those that successfully do so, experience modification ratings are used to adjust an employer’s workers’ compensation premiums. Those employers who experience fewer or no claims are rewarded with a credit toward their premiums, while those employers who experience a higher number of claims may face increased premiums.

Determining an employer’s experience modification rating, or experience mod, involves fairly detailed and complex calculations which are designed to tailor the final premium cost to the employer’s actual claims experience. In short, the experience mod compares an employer’s actual workers’ compensation claims experience, typically over a three year period, with that of other employers operating in the same type of business with a similar number of employees.

If an employer’s claims experience is consistent with the industry average, then the experience mod is 1.0, which when multiplied by the base premium, will not serve to increase or decrease the premium. However, if an employer’s claims experience is 25% better than the industry average, then the experience mod will be .75, which when multiplied by the base premium, will decrease the premium by 25%. Alternatively, if an employer’s experience is 25% worse than the industry average, then the experience mod will be 1.25, which will operate to increase the premium by 25%. Therefore, by maintaining a safe workplace, employers can significantly reduce their workers’ compensation premiums.

In addition to having this basic understanding of the experience modification rating process, it is helpful to know some of the features of the ratings process so an employer can tailor its safety and loss control procedures to maximize the benefits afforded by the experience mod.

For example, since the cost of a specific workplace injury is statistically less predictable than the likelihood of an occurrence of an injury, the experience mod places greater weight to accident frequency than it does to accident severity. In other words, an employer having one loss totaling $100,000 compared to an employer having 10 losses totaling $100,000 will have a better experience mod. This is because the employer suffering one loss is seen as the more stable risk. And, given the unpredictability of the total cost of an injury, the experience mod calculation takes into consideration the possibility that any single injury could have astronomical costs, thereby making a higher frequency of claims a greater risk than a single, expensive claim. Since a workplace with a higher frequency of claims involves a greater risk, the experience mod will operate to make the premiums higher.

Employers should also know that medical-only claims do not have as much of an impact on the experience modification as do indemnity claims. Since the calculation reduces the value of medical-only claims by 70%, employers are not necessarily penalized when they occur. Moreover, the existence of open claims, or claims that have not yet been resolved, can negatively impact the experience mod, so employers benefit from getting claims resolved and closed.

In addition to adjusting an employer’s experience mod, some insurance companies may reward employers by offering payments, typically called dividends, to insureds that eliminate or otherwise limit the number of claims filed by their employees. These dividends, which are generally reserved for the most attractive risks, are usually based on a sliding scale wherein the amount of the dividend decreases as the number of claims increases. However, it is important not to get too caught up in the most generous dividend percentage. For example, if an employer has a history of at least four workplace injuries per year, then it is unrealistic to focus on the dividend percentage that is available only to those insureds experiencing no injuries. The best approach is to compare dividend percentages that comport with an employer’s specific claims history.

Understanding all the aspects of the workers’ compensation experience modification rating system, including the manner in which it can be addressed to achieve the maximum benefit, can be overwhelming. That is why it is important to utilize the services of an insurance agent who is familiar with not only the ins-and-outs of the experience mod rating system, and available dividend plans, but who can also provide information regarding loss control and workplace safety.

Despite the lack of competitive premiums in some states, maintaining a safe work environment remains the best way to reduce the cost of workers’ compensation insurance. By understanding the nature of the workplace, including procedures which may be incorporated to reduce the number of claims, the right insurance agent can work with the insurance company to ensure claims are treated appropriately in order to take advantage of the benefits afforded by the experience modification rating system.

Posted by Martin Salcedo on February 18, 2010 at 10:50 AM in Commercial Insurance | Permalink

The Soaring Costs of Workers' Comp

Despite rigorous efforts to control costs and prevent accidents, employers still are seeing staggering premium increases. Here's why the costs keep climbing, and what some companies are doing about it.

By Annmarie Geddes Lipold


Dade Behring Inc., a $1.2 billion medical diagnostics manufacturer in Deerfield, Illinois, did everything right to keep its workers’ compensation premium down. Still, its insurance bill soared a punishing 100 percent.

Despite its efforts--shopping around for the best and cheapest insurance, demonstrating to insurers its commitment to curbing costs--the 6,600-employee company saw the price tag skyrocket. Even after a deductible increase, the insurance tab doubled, says Paul Moss, the firm’s vice president for global health, safety, and environment. "In this kind of marketplace, you can do all the right things and still not see a reflection in your rates, and that’s pretty scary."

Dade Behring’s experience is a warning--workers’ compensation insurance premiums will soar when policies come up for renewal, and there’s not much you can do about it. Even rigid accident-prevention and cost-control programs may not help much. While Dade Behring’s whopping increase may be unusual, the company is one of a growing number of firms that are experiencing huge jumps in workers’ comp insurance premiums. Base rates, which are used by insurers to determine premiums, are rising in a number of states, with some seeing double-digit increases: Hawaii, 15.8 percent; South Carolina, 20.3 percent; and Florida, 21.5 percent.Dade Behring employed a comprehensive arsenal to keep costs in line. It included the usual solutions such as workplace accident prevention, effective claims management, and returning employees to work as soon as medically possible. The company has instituted intensive ergonomics and safety programs and aggressively manages claims filed by injured employees. Other companies such as International Truck and Engine Corporation have developed impressive employee health and safety and medical case management programs.
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Why is the workers’ compensation system straining to sustain itself?
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So why the big cost increases? Why is the workers’ compensation system, which was designed to provide medical care and wage replacement for workers who suffer work-related injuries or illnesses, or death, straining to sustain itself? The answer lies in a convergence of factors: rising claim costs, deregulated pricing, harder-to-obtain reinsurance, and the specter of workplace terrorism. And there’s no relief in sight, says Robert Steggert, vice president of casualty claims for Marriott International, Inc.

Not long ago, mandatory insurance was a routine business cost. But rising premiums and claims costs are spurring employers to invest even more money to control costs, says Sara Taylor, president of Structured Health Resources Inc., a Chicago disability-management consulting firm. "Employers are recognizing that they have to be actively involved to look out for their best interest," she says. At the same time, insurers are expecting employers to be more than premium payers. Taylor says they want partners.

Dade Behring, which has been through several mergers and acquisitions in recent years, seems like the ideal partner. A comprehensive workers’ compensation effort brought company costs down 600 percent from 1999 to 2001. Its workplace-safety efforts during the same period resulted in a 200 percent reduction in lost workdays and, recently, two consecutive months of zero lost workdays due to occupational incidents.

International Truck and Engine, a manufacturer in Warrenville, Illinois, undertook a "very aggressive" safety program that reduced the frequency of occupational incidents among its 17,000 employees by 20 percent from 2001 to 2002, says Dr. William Bunn, vice president of health, safety, and productivity. But the safety and case-management initiatives have simply kept insurance premiums from going up even more, Bunn says. In 2002, the premium increased 18 percent, to $2.3 million. Meanwhile, the cost of its self-insurance--80 percent of its workers’ compensation program--dropped 27 percent, from $3.2 million in 2001 to $2.1 million in 2002. "We lose some control over increasing costs when we use external insurance," Bunn says. In locations where the company has gone from insurance to self-insurance, he adds, costs have generally dropped by a third.

Insurers in distress"Workers’ compensation is in a period of financial distress," says Peter Burton, senior division executive for state relations for the National Council on Compensation Insurance, Inc. Insurers paid out an estimated $1.27 in claims in 2001 for every dollar they collected from employers, according to NCCI data. This business insurance line is very unprofitable, Burton says, and insurer insolvencies are becoming more common.

Since 2000, premiums have risen, Burton says. Individual employers’ premiums are based on such factors as the state the employer is located in and the employer’s industry, amount of payroll, and frequency and severity of filed claims. Average premiums in the 37 states from which NCCI collects policy data increased about 5 percent for 2001 and about 11 percent for the first half of 2002.

"I see increases in losses and insurance costs as far as the eye can see," says Bruce C. Wood, assistant general counsel for the American Insurance Association. "It’s only a question of how much costs are going to go up."

Even though it’s shocking to see insurance bills soar, Burton says workers’ compensation is still more affordable than it used to be. Employers spent $56 billion for the nation’s oldest form of social insurance in 2000, according to the National Academy of Social Insurance in Washington, D.C. But the collective employer price tag was $61 billion in 1993, the academy reports. Viewed another way, the cost of workers’ compensation per $100 of payroll was $1.25 in 2000, down 39 percent from its 1990 apex of $2.18.

"Prices are going up, but not fast enough to take into account the serious under-pricing in previous years," says John Burton, an industry expert at Rutgers University and editor and publisher of Workers’ Compensation Policy Review.Premiums began to come down in the mid-1990s, as new state laws cut costs and deregulated rates, which greatly expanded what insurers could charge for premiums. By the late 1990s, with insurers competing for market share as claim costs were declining, workers’ compensation insurance became "terribly cheap" for employers, he says. It also became a more profitable business for insurers than at any time in the previous 30 to 40 years.

Declining claim frequency also helped keep costs down. Workers were filing fewer workers’ compensation claims partly because employers were being safer, Burton says. Also, new laws in some states put limits on what was compensable.

In Oregon, for example, legislative changes made in the late 1980s and early 1990s reduced claim frequency by 25 percent. But, Burton warns, "You can go only so far when trying to reduce eligibility for workers’ compensation benefits without the possibility of opening tort suits."

The number of filed claims dropped about 36 percent during the 1990s in the 37 states where NCCI collects information. This enabled insurers to make money even as the cost of the average lost-time claim rose, says NCCI’s Peter Burton. But preliminary evidence shows that claim frequency is now beginning to level off, he says, even as the cost of the average claim continues to climb.

Wage replacement and medical costsThere are two factors behind the rising cost of workers’ comp claims. Wage-replacement costs rose roughly 6.6 percent annually from 1996 through 2001, according to NCCI. And medical costs jumped 11.5 percent in 2001, after a steady climb of about 7.5 percent from 1996 through 2000. Meanwhile, reinsurance--the financial backup for insurance companies--has been harder to obtain and afford, Wood says. Because insurance companies are legally required to pay all losses and have been having a difficult time getting affordable reinsurance, they have to collect additional money from employers. "Workers’ compensation insurers really have nowhere to run and nowhere to hide," Wood says.

He says that the Terrorism Risk Insurance Act of 2002 is intended to resuscitate the reinsurance market. Signed into law by President Bush in November, the bill provides temporary financial security of $100 billion annually to insurance companies in the event of terrorist attacks.

Lobbyists pushed for the bill after September 11--the largest catastrophic workers’ compensation loss in history. Rising workers’ compensation costs had already made the insurance industry vulnerable, says Burton of NCCI. The terrorist attacks made matters worse. According to NCCI, workers’ compensation insurers can expect to pay up to $2 billion for 9/11 claims, not including claims for cleanup and mental distress.

Since 9/11, insurers also have new underwriting criteria, Wood says. Insurers, for example, are evaluating an employer’s geographic location and industry group.

"Workers’ compensation carriers are betting their companies that there will not be another sizable terrorist attack," Wood notes. And so are self-insurers like Marriott. The 145,000-employee hotel giant expects to pay $10 million for workers’ compensation claims arising from 9/11. Two employees died helping guests out of Marriott’s 22-story World Trade Center Hotel, which was totally destroyed. Another 146 employees who worked at that hotel and the nearby Marriott Financial Center Hotel filed workers’ compensation claims related to the event, Steggert says.

Twelve employees who were not even working on 9/11 filed workers’ compensation claims for mental stress. The fact that one of these claims was considered by a judge to be compensable when the employee was not even on the job was "really shocking."

Marriott got a 25 percent increase in reinsurance costs for the 2002 insurance year. Because it has concentrations of employees in large buildings, Marriott has been affected by new underwriting approaches since the terrorist attacks.

In short, Marriott is already employing all the best practices to keep costs under control. Now, like Dade Behring, all it can do is wait for cost pressures to subside.
Workforce, February 2003, pp. 42-48 -- Subscribe Now!
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Annmarie Geddes Lipold is a freelance writer based in Arlington, Virginia. To comment, e-mail editors@workforce.com.