Workers’ compensation should be a win-win proposition for employers and employees, but many contractors describe it as an insurance and risk-management pain point. Workers’ compensation premium is a major part of contractors’ total insurance costs, and the indirect costs associated with claims are a significant multiplier.
Additionally, recent formula changes have caused some companies to receive a higher experience modification rate (EMR). The increasing use of prescription medications, improper use of medical services and diagnosis of comorbidity conditions (i.e., disorders related to a primary disease) among workers are boosting medical costs, which have surpassed lost-time indemnity benefits as the largest component of loss costs. And the construction industry’s workforce shortage is leading to the hiring of less-experienced workers, who are more vulnerable to injuries.
In short, employee injuries affect productivity, quality and profitability on projects, thereby affecting a company’s overall financial performance. As such, workers’ compensation can be either a competitive advantage or disadvantage.
Companies that do not gain control over their workers’ compensation processes will face pressures to reduce costs elsewhere or carry higher levels of unallocated overhead. The result will be felt by higher insurance costs, increased bid rates and decreased productivity yields, as well as squeezed profit margins.
Start with an audit
A workers’ compensation audit diagnoses relative strengths and weaknesses of policies, procedures and protocols, and provides a roadmap to improve performance. An insurance advisor can help evaluate the company’s capabilities in three important phases, each targeting a diferent focus and desired outcome (see chart).
It’s important to review injury and claim performance metrics. A comprehensive loss analysis of the number, type, frequency and severity of claims is useful, especially when compared with exposure (whether payroll, work hours or full-time equivalency). The median duration of lost workdays per lost workday case can be compared against industry metrics by type of contracting operation. Although these are lagging indicators, they provide clues about where to focus prevention-based activities that then can be monitored as leading indicators.
Larger contractors with more payroll exposure and more complex operations also may be interested in an alternative insurance program structure, such as intermediate or large-deductible, retrospectively rated and captive insurance programs. Many contractors seek to reinforce management accountability for workers’ compensation improvement by instituting premium-allocation and loss-cost chargebacks to operating divisions or departments. This information is useful in bonus program calculations.
A workers’ compensation audit should carefully consider the classifications of workers by job type and payroll code. Proper classification is essential to ensuring workers’ compensation premiums are being properly calculated. This helps prevent adjusted premiums or return premiums following a premium audit, and helps ensure proper classification of the company’s EMR. It may be advisable to review open major claim reserves well in advance of carriers filing unit stat reporting data for purposes of calculating EMRs.