Tag Archives: wells

How to Lose $7 Billion a Year

It is estimated that commercial property writers lose out on more than $7 billion annually in business interruption insurance, a line that could deliver increased and sustainable earnings upside annually but has often struggled to do so. This loss represents not only undervalued policies, but also income lost because of premium calculations that are not commensurate with risk.

As with other property business, the No. 1 culprit is the decades-old difficulty that insurance companies’ face establishing adequate coverage limits for property lines — and business interruption insurance (BII) often has worse results than insurance on buildings and contents.

For the past 10 years especially, the property insurance industry worldwide has been buzzing with concerns about coverage adequacy for BII. The problem affects both business owners policies (BOPs) and the larger package policies (CPP/SMPs).

Caroline Woolley, senior vice president at Marsh’s Business Interruption Center, wrote a comprehensive report in 2015 summarizing the challenges the industry faces making BII coverage profitable. Woolley lays out five major obstacles that agents, companies and brokers face when underwriting this coverage line. Woolley says the No. 1 problem is simply “getting the values right” when policies are first written and again at time of renewal.

The valuation concern stems from the fact that there has been no standardized, simple-to- learn-and-use insurance-to-value (ITV) system for BII coverages similar to what is done today for buildings and contents.

No. 1: Getting the values right

According to a survey conducted by the Chartered Institute of Loss Adjusters in 2012 ((and quoting from PMWBG)), 40% of declarations were deemed too low by about 45%. More recently, PMWBG research shows as much as 58% of BII coverages are undervalued by 48%, suggesting the problem is getting worse at a time when demand for property insurance is in decline and competition is fierce.

Inadequate coverage disenfranchises consumers, and improper valuation undermines providers. In a very competitive marketplace, where too much supply is chasing dwindling demand, carriers losing on the valuation front lose reputation, financial advantage and long-term revenue.

From the inception of BII coverage in the 1930s, calculating risk-specific BII limits has not been easy. The BII coverage addresses shortfalls in the margins corporations face when loss occurs, so underwriters, brokers and agents should understand key variables in the insured’s financials. Unfortunately, not enough industry professionals are proficient in this area, leading to costly exposure errors, pricing mistakes and the age-old dilemma of undervaluation.

As important is the fact that, unlike with other lines, there has been very little third-party data to aid insurers with BII calculations. 

When losses occur, it’s too late in the game to correct undervaluation problems. The impact, especially in today’s economy, where wildfires, storms and other disasters routinely happen, has caused companies like Marsh to look again at the coverage line, suggesting the need for industry-standard ITV calculation tools.


Now, modern web-enabled technology offers both substantive raw data on businesses that actuaries will want to work with to improve pricing models, at the same time carriers will use the program’s web-based ITV system to calculate detailed BII coverage reports for the majority of businesses found anywhere in the U.S. Virtually any enterprise can be valued, with complex insurance specific data sets searched automatically on behalf of the user to both pre-fill input and create BII reports.

First Step to Success

Vast amounts of insight about corporations and their supply chains can be aggregated on to estimate BII limits in seconds, accessible anywhere from the Internet.

In the case of the BOP sector, actuaries and pricing managers have instant access to large amounts of aggregated data for the various sizes and types of business insured, to develop more representative and localized pricing models. Users can also adjust models automatically for the business opportunity rather than offer one-size-fits-all pricing. Additionally, because core data changes annually, savvy users can also upgrade model variables.

What’s the Cost of the Polar Vortex?

Long-range forecasts don’t all agree on the weather or how we label it, but another winter of extreme cold may be upon much of the nation. I’m personally convinced one is because even where I live, in Tennessee, my dog, Max, is vocally rejecting his outdoor house at night — and that doesn’t usually happen until January. While Max and I, having lived in the South all our lives, may be wimps when it comes to the cold, conditions are clearly calling for an alternate plan. And that brings me to today’s topic: From a workers’ comp and safety perspective, did last year’s polar vortex provide any important lessons?

Slips and falls

Slips, trips and falls, according to OSHA, contribute to 15% of all workplace fatalities — second only to motor vehicle accidents. WorkCompWire recently reported that nearly one-third of all workers’ comp claims in the Midwest last year were because of slips and falls on ice and snow, doubling the rate of the previous year.

This data, from the Accident Fund and United Heartland, represents only five states, so I don’t want to say we have a national trend — but I am eager to see 2013-2014 data from the Bureau of Labor Statistics or other major sources. Would it be surprising if percentages were even higher in areas where extreme winter weather is rare?

While it will be another year before the first “polar vortex” slips and falls from late 2013 show up on experience mods, I thought it would be interesting to set up a few scenarios and with the help of ModMaster illustrate how an increase in these accidents might affect an employer’s experience mod and premium.

The cost in terms of mod points – and increased premium

For the following scenarios, I assumed an average slip and fall on the ice would cost $22,000, which is in range of varied statistics I found on the web. Of course, an actual slip-and-fall expense could vary from very little to tens of thousands of dollars, depending on complications and time away from work. As you see below, whether the loss is kept as a medical-only loss or involves indemnity makes quite a difference – although, in actuality, an indemnity claim is probably going to be quite a bit higher than $22,000. As a reminder, in most states, medical-only losses are reduced by 70% because of the experience rating adjustment (ERA) rule of the experience rating formula.

For the first scenario, let’s imagine a relatively small machine shop with about $1.5 million in annual payroll. This company’s minimum mod is 0.79, and the manual premium is $75,000. As you can see below, a single average slip and fall would increase the mod by 8 points (on a scale of 100) and increase the premium by 10% – unless the claim is kept medical-only, in which case the impact would be only 3 mod points and about 3% of the premium.


In a second scenario, let’s imagine another small company, one that consists of office workers. Because this company’s expected losses (not shown) are much less than in the first scenario, the company’s minimum mod isn’t as low as our first example. Furthermore, the impact of a single slip and fall is much more significant in terms of mod points. However, this company’s manual premium is only $5,000 — so while the premium impact of the slip and fall may not seem too significant in dollars, the percentage increase of their premium is notable.


Finally, I wanted to see what kind of impact  several slips and falls might have on a larger company. My mind is already on holiday baking, so let’s imagine a cookie factory of several hundred employees and about $20 million in annual payroll. Then let’s imagine that, during a particularly bad patch of weather, seven people slip and fall in the parking lot and three more slip and fall in an entryway that has become wet with melting ice. For this company, which has a minimum mod of 0.43 and a manual premium of $500,000, those 10 slips are still a hefty impact if they’re not held to type 6.


For the examples above, I’ve depicted companies whose workers are not primarily assigned to environmentally challenging conditions. Imagine the spike in injuries and cost for companies whose employees are exposed to cold stress.

‘The tip of the iceberg’

Slips and falls certainly aren’t the only winter issue. Workers’ comp and insurance news and blogs are populated with lists and stories of all types. Consider just a couple:

1.  A recent story in Business Insurance concerns an employee injured when her employer gave her a ride in the floor of a company van during a snowstorm. While the employer was clearly trying to help out its employees, this employee is due benefits, a NY court ruled, because she was still on the clock, and the employer “took responsibility for the inherent risks of transporting its employees from the worksite.”

2.  Although it’s not mentioned as a weather-related issue, it’s easy     to imagine that a situation like this wet floor case could have developed because of rain or snow. The moral of this particular story? A “wet floor” sign is a safety device that an employer must ensure is utilized, not just made available to custodians.

Regardless of the cause of any injury, a popular analogy in risk management is that the cost of workers’ compensation insurance is just the “tip of the iceberg.” In addition to direct insurance, medical and indemnity costs, the full costs include administrative expenses, potentially significant impacts to a company’s productivity and the injured employee’s overall well-being. By the most conservative estimates, an average slip of $22,000 may actually cost twice that — and by some estimates may approach $100,000 in total costs.


As the examples above show, the experience mod and cost impact of winter-related accidents are sure to vary considerably from one accident and one company to the next. Regardless of exact cost, the reported uptick in slips and falls on ice and snow should serve as a flare on a snowy roadside, reminding us that every company, regardless of its size or geographic location or the type of work it does, needs some level of preparation for extreme weather in terms of policy, operations and equipment. (Broker Briefcase is a good resource to help.)

Even before I read the news about the increase in Midwestern slips and falls, a prevalence of winter-related slips and falls had stood out to me in loss runs that I occasionally see in the process of assisting clients. Have you seen evidence of this, as well? How are you helping your client or company understand the potential cost of just one winter weather loss, and to prepare as much as possible for avoiding or mitigating that loss?

I’d love to hear your thoughts in the comments below.

How Health Rebates Affect Workers’ Comp

In a popular article published earlier this year, Mark Walls examines the complex relationship between the Affordable Care Act (ACA or PPACA) and workers’ compensation. While I recommend the entire article, today I want to focus on one point that Mark highlights. In preparing for the effects of the fully implemented ACA, Mark advises that employers should:

“Carefully manage the approach to healthcare premium rebates, which could affect how payroll is calculated under workers’ compensation.”

I’ll be honest – until I read Mark’s article, I was happily leaving all of Zywave’s ACA discussions to our own Erica Storm, an attorney who’s been monitoring and writing about healthcare reform for several years. But the words payroll and workers’ compensation jumped out at me. If workers’ comp payroll can be affected by the rebates, then so can experience mods and workers’ compensation premium. How much impact are we talking about? With Erica’s help on the ACA side of things, I delved deeper into the topic.

Premium rebates introduced by healthcare reform
The concept of health insurance premiums affecting workers’ compensation payroll is not new, but ACA-mandated rebates, which began in 2012, have introduced a new level of complexity in the accounting. ACA requires insurers with a certain medical loss ratio (MLR) to issue a rebate to employers. Guidance to employers on rebate options is vague, but options may include

  • passing along MLR rebates to employees,
  • applying rebates to future premiums, or
  • applying rebates to benefit enhancements.

Whatever option is chosen, the plan sponsor must follow the fiduciary duties of prudence, impartiality and acting for the exclusive benefit of plan participants. When employers pass along any portion of the rebates to employees, such rebates must be counted as payroll for the purposes of workers’ comp. Note that this rule applies as long as the rebate to the employee is through the employer and not directly from the insurance provider. The rule also applies regardless of whether the rebate distribution is taxable or non-taxable.

Payroll rules in more detail
Payroll for the purposes of workers’ compensation is defined in the applicable bureau manual; the majority of states use NCCI’s Basic Manual for Workers Compensation and Employers Liability Insurance. Rule 2-B-1 lists payment types included and rule 2-B-2 lists payment types excluded for the purposes of calculating workers’ compensation payroll. But most helpful with regards to rebates is a separate NCCI article, The Patient Protection and Affordable Care Act and Workers Compensation Premium Determination. Be sure to check out the handy tables to make sense of how both insurance premiums and rebates can be included or excluded from payroll.

A sample scenario
An employer’s decision on what to do with a rebate can be complex, depending on the type of group health plan and whether the rebate is considered a plan asset.  The workers’ compensation aspect is admittedly almost an aside. Yet as we all know, even small impacts add up. For an employer that passes along a rebate to its employees, how much impact might that employer experience on its mod and premium as a result?

To answer that question, it’s first important to note that the state and insurer matter. In many states, the average rebate paid in 2013 (for 2012 premiums) was less than $100 per family. Clearly, for many employers, that isn’t going to significantly affect payroll through rebates. However, in some states and for some plans, the average rebate was much higher. According to government data on 2012 premium rebates, 10 states (excluding territories) had large group rebates averaging from $340 to more than $1,250; eight states had small group averages of $300 or more.

Using that information as a rough model, I constructed a sample “high rebate” scenario to test its effects on workers’ comp premium. I imagined:

  • a 100-employee manufacturing business in Illinois
  • an average hourly wage, including most benefits, of $35.00 (roughly based on June 2013 Employer Costs for Employee Compensation data for goods-producing occupations from the Bureau of Labor and Statistics). For simplicity’s sake, I’ve assumed that all costs are reportable for workers’ compensation purposes.
  • 80% of the workers in payroll code 2797 – manufacturing
  • 20% of the workers in payroll code 8810 – office work
  • a relatively high level of losses that has driven the company’s mod to 1.20, while the minimum mod, based on zero losses, is 0.61 (these values were determined using ModMaster)
  • two rebate levels to analyze, assuming for each that the full amount is returned to employees:
    • a high but not unrealistic $1,000 rebate
    • a probably unrealistic $3,500 rebate

First let’s take a look at the calculation of this sample company’s manual premium, followed by its final premium at various mod levels.

Before any health insurance rebates, our sample company has a mod of 1.20 and associated premium of over $800,000. Note how low their minimum mod and premium could be.

Before any health insurance rebates, our sample company has a mod of 1.20 and associated premium of more than $800,000. Note how low the minimum mod and premium could be.

When a $1,000 rebate is introduced, the manual premium is increased by the same percentage as the effective total payroll increase – in this case 1.4%. But what I was very curious to see was whether, in the mod calculation, the increase in payroll was enough to increase expected losses and thus lower the mod, thereby offsetting some of the manual premium increase. As you can see below, this was not the case. Although expected losses (not shown) did increase, they didn’t increase enough to actually change the minimum mod or current debit mod values.

A $1,000 per employee rebate edges up payroll, but not enough to significantly impact expected losses in the mod calculation. The effective rate of the payroll increase therefore applies to the final workers' comp premium regardless of the mod value.

A $1,000 per employee rebate edges up payroll, but not enough to significantly change the mod calculation. The effective rate of the payroll increase therefore applies to the final workers’ comp premium regardless of the mod value.

So how large would rebates need to be to actually affect the mod as well as the premium? I experimented with several rebate levels and for this payroll scenario found that the magic number was somewhere around $3,500:

A $3,500 per employee rebate impacts payroll enough to change both the current and minimum mod values. This makes estimating the ultimate impact on workers' comp premium a bit more complex, requiring an analysis like this one.

A $3,500 per employee rebate affects payroll enough to change both the current and minimum mod values. That mod decrease in turn mitigates the overall premium increase.

When $3,500 is added to each employee’s salary, the resulting increase in expected losses in the mod formula is enough to drop the minimum mod by 0.01 and the current debit mod by 0.02. For this example, that offsets the 4.8% payroll and premium increase to only 3.1%.

In summary
The above example is considerably simplified; in reality, the included/excluded payroll calculation would be more complex, and additional premium credits and debits would likely apply. Results could vary greatly with company size, as well. Nevertheless, the example suggests:

  • As a rule of thumb for employers considering their rebate options, it seems reasonable to use the total amount being rebated to employees divided by the original included payroll as an approximation of the employers’ workers’ comp premium increase. The actual increase may vary when accounting for a change in the mod value or effects of other premium debits and credits.
  • Even a rebate of less than 1% may, if returned to employees, add up to thousands of dollars of premium expense for all but the smallest employers, in addition to the administrative costs of processing the rebate.
  • While relatively high-dollar rebates may be rare, employers should be especially sensitive to their increased impact on premium.

Employers should also keep in mind that, per NCCI, “an employer is required to keep records of information needed to compute premium. In addition, the employer must provide those records to the carrier, when requested, for the purpose of auditing the employer’s workers compensation policy.”

While some insurance professionals suggest that rebates may diminish with time and premium stabilization, others disagree. There’s also been discussion in the press of possible policy endorsement or other changes to protect employers from additional premium charges as a result of rebate distributions. The one thing we can all agree on is that the “bigger picture” relationship between ACA and workers’ compensation is a blurry image that will take years to fully develop.

Have you or your clients experienced a mod or workers’ compensation premium increase because of distributing a MLR rebate to plan participants? I’d love to hear your experience in the comments below.

Is Paying Small Work Comp Claims Out of Pocket Ever Smart?

Many of you are well-versed in the importance of medical-only claims to the experience modification rating process. In the vast majority of states, these claims, also known as injury or IJ code type 6 losses, are reduced by 70% for the purposes of the mod calculation. This reduction is known as the experience rating adjustment (ERA).The ERA was first implemented in many states in the late ’90s to encourage employers to report all losses, not just those involving lost-time claims. At that time, it was common for companies to pay, rather than report, their small claims to avoid having those claims count against the mod. NCCI and other stakeholders were interested in collecting all possible data for statistical actuarial purposes, so the ERA was introduced. More than 15 years later, a reduction of medical-only losses now applies in 38 states, but within the industry I still hear a fair amount of talk about employers self-paying small workers’ compensation claims — even in ERA states. The many responses to the March 9, 2014, question “Do Employers Have to Report First Aid Claims?” on the Work Comp Analysis Group on LinkedIn illustrate how complex this issue can be. (Claims designated as “first aid” often have a different connotation from “small medical-only claims” in some states and to some carriers, but the discussion definitely overlaps with this article.)

All of this talk raises the question of whether we can analytically show that it saves– or costs — the employer to pay small med-only claims “out of pocket.” With the help of ModMaster, that’s what I examine in this article. Before we look at some scenarios, let’s not forget the following points.

Key factors to keep in mind

  • Self-payment of small claims is not legal in all states, or may be subject to fines or penalties. Specific rules are determined by state workers’ compensation statutes. For example, the Missouri Department of Insurance specifically suggests taking advantage of the state’s Employers Paid Medical Program to reduce the cost of work comp coverage. Clearly, it’s important to know the rules in your state.
  • Self-payment of claims also has implications at the federal level if injured employees are eligible for Medicare.
  • Employer access to state or “reasonable and customary” fee schedules is an important consideration in the cost of self-paid claims.
  • Perhaps most important, employers paying small claims out of pocket may risk liability if those claims should develop into something more costly.

A sample scenario in states where ERA is approved

For this analysis, I’ve imagined a relatively small business, Mike’s Machine Shop, operating in Missouri and Indiana (both ERA states) with these attributes:

  • An effective date of 1/1/2014
  • Approximately $1.7 million to $1.8 million in payroll each year, in codes 3632 and 8810, generating a minimum mod of 0.73
  • Three itemized losses, all type 5: $8,000, $12,000 and $45,000
  • The assumption that the shop had one $1,000 med-only claim per month in 2012, for a total of $12,000 in type 6 losses. (I chose $1,000 as a value that’s clearly med-only and yet above what might be considered a first-aid-only claim in some states.)

The good news is that self-paying creates a lower mod and therefore a lower premium. In 2014, Mike will save three points on his mod and $1,500 on his premium if he doesn’t report those 12 small claims. And, because those claims aren’t hanging around on his mod for two more years, he’ll save about $1,500 in 2015 and 2016, too. But we’re not done with the story! The bad news is that the self-paid claims costs add considerably – in this case $12,000 – to Mike’s Year 1 total cost of risk.

Let’s look at Year 2 of this scenario and imagine that Mike has instituted some safety improvements so that the shop has had just one small claim per quarter in 2013, for a total of $4,000 in type 6 losses. Let’s also imagine, for the sake of this analysis, that payroll and the other itemized losses have stayed exactly the same, as have rating values.

If Mike is not reporting small losses, then his mod and premium are the same as in 2014. If he is reporting the small claims, then the new claims in 2013 drive his mod to 0.99 — one more point than the 2014 mod. Cumulatively, the 2012 and 2013 small reported claims are responsible for four points, or approximately $2,000 in premium. Because Mike’s self-paid claims costs are considerably lower this year — $4,000 — then the Year 2 total cost of risk differs only by $2,000 between reporting and not reporting losses. Still, though, Mike has a financial advantage to report claims, especially when considered over the cumulative two-year total cost of risk.

The same scenario in a non-ERA state

If Mike were operating in a state that has not approved the ERA reduction, then the impact on the mod of small med-only claims is certainly more significant, and it’s easier to see how the scales could tip in favor of not reporting. However, in this example, using all the same assumptions as above, the overall cumulative cost savings still favors reporting of claims.

In states that have not implemented the ERA reduction, the total cost impact of paying work comp claims out of pocket requires especially close analysis.


These, of course, are just a couple of scenarios, and there are myriad reasons that ultimate costs could vary from these simple examples. However, in all the scenarios that I’ve constructed (many more than discussed here), paying small claims out of pocket seems hard to justify in ERA states. Even in non-ERA states, deciding whether to pay small claims out of pocket demands a detailed analysis that accounts for all associated costs, such as any fines and applicable medical fee schedules. In all cases, knowing your state rules is imperative. Refer to your state’s Department of Insurance or to the NCCI’s Unit Statistical Reporting Guidebook for more information.

As an analytics enthusiast, I tend to believe that claiming all losses results in better data — not just for the bureaus or insurance carriers but also for employers. And better data, of course, leads to more meaningful analysis opportunities. If an employer is working with an agent, broker or other risk management professional to analyze and act on their mod data, then why not have the complete picture and reveal all trends and drive the most appropriate operational initiatives toward improvement?