I'm always a bit skeptical when companies report the results of self-serving surveys, so let's look at what Aflac — you know, the duck-spokesman company — said about a survey that indicated that offering disability insurance coverage to workers could drive workers' compensation claims down considerably. The survey found:
- 42% of all companies providing voluntary accident and disability insurance report declines in their workers’ comp claims—some of as much as 50%.
- Roughly 17% of employers offering voluntary accident insurance and 15% of those offering disability saw claims declines of 25% to 49%. The declines were most frequent for large employers, 55% of whom saw workers’ compensation claims drop. Of small- and medium-sized companies, 34% reported the same results.
Is this really true? Can simply purchasing disability insurance really lower the number of workers' compensation claims? Forgive me for immediately thinking that this sounds a bit like the marketing strategy of snake oil salesmen: “Buy one bottle of this magic elixir, and it cures everything from rheumatism to scarlet fever.”
I can think of three reasons why “purchasing disability insurance = lower workers' comp costs” may not be a valid equation.
1. Lower claims may not amount to lower costs.
In the exposure mod rating game, there is no question that lowering the number of claims can reduce the E-Mod and result in lower premiums. However, just because the claims are lower does not automatically mean that the costs are lower.
For example, if the claims reduced by the purchase of disability insurance were small medical-only claims or small lost-time claims, this would reduce the actual number of claims but may not have much of an effect on the E-Mod of a large company that also has more serious injuries. Sure, the number of claims may have gone down, but if Acme Co.’s comp costs stayed the same because of the presence of larger or more serious claims, does that really amount to a substantive benefit?
2. Disability insurance cost may exceed any savings on workers' comp.
What this survey doesn't tell us is how much companies had to spend on disability insurance coverage to realize the savings in workers' comp costs. In other words, did Acme Co. have to spend an additional $100,000 for the disability insurance coverage to save $40,000 in workers' comp costs? If so, that doesn't seem like much of a bargain – – spending $100,000 to save $40,000 (unless we use U.S. federal government math. . . . )
The survey didn’t give us this information probably because the costs to purchase disability insurance coverage would be different for every company surveyed, as would the savings (if any) from the alleged reduction in workers' compensation claims. Nevertheless, I don’t see how we can determine the validity of the “purchasing disability insurance = lower workers comp costs” equation unless we know the ratio of dollars spent on disability insurance vs. the dollars saved in workers comp costs.
3. Why would injured workers leave money on the table?
Let’s assume that Joe Sixpack is injured on the job. If his employer, Acme Co., has both disability insurance and workers' comp coverage, Mr. Sixpack now has a choice of how he seeks payment for medical care and payment of lost wages. The implied argument from the survey is that if Mr. Sixpack has the choice between the two, he will choose disability insurance over workers' comp, thereby reducing the number of comp claims for Acme Co.
But wait…does disability insurance pay for permanent partial disability benefits? Does disability insurance pay for permanent total disability? Does disability insurance pay benefits longer than the term specified in the policy?
Obviously, the answer to these questions could vary. However, in most states, workers' compensation coverage would pay an injured worker a lot more money than the type of disability coverage refererred to in the survey. I’m not attempting to argue that injured workers should choose workers' comp over disability insurance — but I am pointing out that claimants will typically choose whichever type of benefit will pay them the most money. If that turns out to be workers' comp, then it is doubtful that claimants would be so magnanimous as to choose to file a claim through disability insurance.
Finally, the state where Mr. Sixpack lives may allow him to file a comp claim after he gets benefits through his disability insurance coverage. The presence of disability insurance wouldn’t even amount to a reduction in claims if Mr. Sixpack pursues both avenues.
Bottom line: If you are considering the purchase of disability insurance coverage because it may decrease your workers' comp costs, make sure the math works. Ducks are cute, but I don’t trust their math skills.