In my last post, I covered the predicament some employers can be in when they want to switch insurance companies due to their premium audit sticker shock. The main consideration is the short rate penalty. The premium audit has just been completed so your company is very early into your next policy.
Your company is going to receive a very heavy financial penalty even though you may have no claims. That is due to the sometimes nasty Incurred But Not Reported (IBNR). The insurance carrier is basically saying there is a risk that even though claims were not reported during the short rate policy, your employees may have unreported injuries. It is a common term.
What is your plan of action if your company is in this “back against the wall” situation? You have seven choices. You can :
- Dispute the audit, if there is a good reason. You may have to call in an audit expert – yes, that was a shameless plug for J&L
- Take the new policy on the chin and wait until the end of the new policy period to switch. The caveat here is you are going to be hit with another audit.
- Calculate the short rate penalty to see how much it will cost your company to switch and pony up the funds. It is not a simple calculation. We do them occasionally. The short penalty tapers off later into the policy.
- Calculate the short rate penalty further into the policy to see if there is a better time to switch. However, you have to the extra premium while you wait and then pay the penalty. This may not make good financial sense. Attempting to game the system will always end up costing more unless you know what you are doing.
- Just consider Workers Comp as overhead and write the check. If you were going to do that, you would not be reading this blog or post.
- Ask for a policy extension. I have rarely seen this agreed to by the carrier.
- Call or email us – even more of a shameless plug
The short rate penalty is calculated with factors from a group of tables. The interesting note is all insurance carrierssay that the short rate penalty explanations are in the policy. The Workers Comp policy usually will only refer to applicable tables and calculations which are not located in the policy.
The best way to avoid this whole situation is with proper policy pre-planning. This involves:
- Calculating your E-mod six months early, yes, it can be done.
- Performing a pre-audit on your current Workers Comp policy to avoid audit sticker shock, especially if you have increasing payroll figures.
- Making sure you have rock-solid job descriptions for all employees.
- As always, making sure you have a good safety program. The less accidents your company has to include in the E-mod system, the better.
Article provided by James J Moore, AIC, MBA, ChFC, ARM. All articles are original content. Check out the full website at www.cutcompcosts.com.