March 27, 2012
How to Have Real Influence Over Your Workers' Comp Costs
by Tom Bone
Most employers consider the renewal date of their workers' comp policy to be the most important annual date for their policy. Unfortunately, employers have been misinformed by the insurance community and this is not the most important annual date.
If employers could have influence over their cost of workers’ compensation insurance, wouldn’t they want to know how?
If insurance agents would help their employer clients lower their costs, wouldn’t that be a valuable service?
Most employers consider the renewal date of their workers’ comp policy to be the most important annual date for their policy. Unfortunately, employers have been misinformed by the insurance community and this is not the most important annual date.
Yes, the renewal date is when the incumbent carrier offers a new 12-month policy with their rates. This is also the date when the employer’s new Experience Modification is used to modify the rates the employer will pay. The Experience Modification is an important factor that rewards (lowering the Ex-Mod) for employers with little or no claims and penalizes (raises the Ex-Mod) for those employers who have had greater than expected claims for the employer’s industry and size.
The application of the Experience Modification is a State process that applies to employers who meet a minimum annual premium. One of the goals of the Experience Modification process is to promote low claims activity and to provide a means to compare that success between employers.
The most important annual date to employers is the review and evaluation of all claims information from the employer’s workers’ compensation carriers before this data is presented to the California Workers’ Compensation Rating Bureau. This data determines the Experience Modification that in turn calculates what the final rates the employer’s incumbent, or any other insurance company, can offer when the policy renews. This event occurs approximately six months into the employer’s policy term. The information provided includes payroll (per classification) and the actual value of each claim the employer may have incurred over the last 4 years. All insurance companies are obligated to use this Experience Modification factor.
Just before the information is sent is the time the claims information needs to be reviewed and perhaps questioned to make sure it is an accurate reflection of the employer’s claims. In my experience, the majority of the value for open claims at this time can be lowered — which will result in a lower Experience Modification factor — which results in a lower future premium paid by the employer. This is really the most important time for employers to be involved — armed with advisors to review claims and audit payroll, the employer has a golden opportunity to reduce their future premiums.
Workers’ compensation is unlike other insurance programs. Think of it as a credit line. Use it and you must pay it back plus more. So, workers’ comp is more of a way of financing workers’ comp claims.
It is amazing to me is that this most important annual opportunity for employers is continuously ignored by insurance agents, insurance companies, and employers (who typically are not informed of this opportunity). Those employers who know about this process become immediately engaged and involved and actively participate in this review process.
Any insurance broker who is not working with their clients to manage this information in an effort to reduce employer’s cost is committing malpractice and should be dismissed. Unfortunately, I continue to see that most insurance agents overlook this important time because they are either disorganized, do not know what to do, or just don’t care.
Insurance companies also seem to not have any financial incentive to lower employer costs. Even Warren Buffett, Chairman of Berkshire Hathaway, a large insurance holding company, commented that since open claims are like free money,we have all of these extra funds to invest to increase stockholder value and higher profits. (Stockholder Letters)