Workers Comp Risk Management Is Like Bag of Apples

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A Bag of Apples Shows How Workers Comp Risk Management Works

Yesterday,  I included a short article with a video from Washington L&I.  The response was very positive on keeping Workers Comp Risk Management toned down to more simplistic terms.

picture bag apples workers comp risk management
Wikimedia License – Toytoy

The customer is always right.

Workers Comp Cost Questions

One of the main questions/complaints we here at J&L hear almost every week concerns the high cost of workers’ compensation premiums.  One of the responses to yesterday’s video article came from an old business friend from long ago.

His comment was “so the more benefits paid out to injured employees, the more premiums paid.”  The subject of the other comments I received was – Why do smaller companies pay more for workers’ compensation coverage?

Higher Claims Costs = Higher Premiums

If the adjuster pays more money on a file or reserves the file with higher amounts that are not yet paid (reserves), your company will eventually pay more workers compensation premiums.   The formula I have written the most in articles is:

Total Incurred = Paid + Reserves  

The total incurred figure feeds into what is reported at 180 days after the start day of your workers’ comp policy.  The insurance carriers report the numbers to the rating bureaus – WCIRB, NCCI, and other independent state bureaus.

The goal of Workers Comp Risk Management is to reduce the costs paid out by using time-tested techniques, and in turn, will reduce an employer’s workers’ comp expenditures by lowering their Experience Modification Factor (Mod).

The Mod individualizes your company’s risk amongst similar companies (classification codes).   Many other factors affect your workers’ comp calculation of premiums.  The Mod is one that your company can control by using safety measures.

The rating bureaus usually forgive one bad accident (just bad luck?) – to a point.  The rating bureaus do not forgive multiple accidents.  Using Workers Comp risk management techniques including safety can get your company back on track in less time than just waiting out the storm.

Smaller Companies Pay More Per Unit of Risk

Unfortunately, smaller companies do pay more per unit of risk.  The bag of apples represents a larger company.   One apple represents a smaller company.

If you purchase one apple, the cost will be more per unit.  If you buy the bag of apples, then the cost per apple is less.

A part of your workers’ compensation premiums is calculated this way.   The service costs of providing a small or large company with a policy do not vary considerably even though the larger companies will pay more premium.

The reason a smaller company pays more on a per-unit basis is the risk.  Usually, larger companies have Risk Managers and Safety Departments.  A small employer cannot necessarily afford these departments or employees.   Operating like a self-insured company has its benefits.

The time for a carrier to recover a loss paid by premiums charged can be 10 years or more.

Large companies can spread the risk amongst many employees, smaller employees cannot spread the risk out.

One of the terms that reduce workers’ comp premiums for larger employers is:

Standard Premium Discount

Discount by Insurance Carrier Type
Premium From:Stock Co.Non-Stock Co.
First $5,0000%0%
$5,000 – $100,000010.9%3.5%
$100,0000 – $500,00012.6%5.0%
Over $500,000014.4%7.0%

The principle behind applying a premium discount to larger workers’ compensation policies is that expenses of handling compensation on a risk are proportionately less, as a percentage of premium, as the risk becomes larger. Typically, agency commissions are also reduced on larger policies.

Let us look at the bag of apples again – using the concept in the previous paragraph, it costs less per apple to provide you with a bag of apples per purchase than just one apple purchased several times.

Workers Comp Risk Management Levels The Playing Field

Even if you do not spend over $5,000 on workers’ comp premiums, you can still use workers comp risk management to control your risk and premiums.  A few suggestions are:

  1. Safety program – some type of safety program needs to be put into action.  Considering premiums as a cost of doing business can harm your company for many years into the future.  Workers Comp is a delayed system.
  2. Loss Control program – if you incur a loss, cut the costs while providing great care for your injured employee by timely reporting the injury, having a medical network in place, and returning the injured employee safely to work as soon as possible.  Check out the Six Keys for more information.
  3. Check out different stores to see how much one apple costs.  Even in the age of COVID, a plethora of workers comp insurance carriers and programs exist in the market.

©J&L Risk Management Inc Copyright Notice

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James Moore

Raleigh, NC, United States

About The Author...

James founded a Workers’ Compensation consulting firm, J&L Risk Mgmt Consultants, Inc. in 1996. J&L’s mission is to reduce our clients’ Workers Compensation premiums by using time-tested techniques. J&L’s claims, premium, reserve and Experience Mod reviews have saved employers over $9.8 million in earned premiums over the last three years. J&L has saved numerous companies from bankruptcy proceedings as a result of insurance overpayments.

James has over 27 years of experience in insurance claims, audit, and underwriting, specializing in Workers’ Compensation. He has supervised, and managed the administration of Workers’ Compensation claims, and underwriting in over 45 states. His professional experience includes being the Director of Risk Management for the North Carolina School Boards Association. He created a very successful Workers’ Compensation Injury Rehabilitation Unit for school personnel.

James’s educational background, which centered on computer technology, culminated in earning a Masters of Business Administration (MBA); an Associate in Claims designation (AIC); and an Associate in Risk Management designation (ARM). He is a Chartered Financial Consultant (ChFC) and a licensed financial advisor. The NC Department of Insurance has certified him as an insurance instructor. He also possesses a Bachelors’ Degree in Actuarial Science.

LexisNexis has twice recognized his blog as one of the Top 25 Blogs on Workers’ Compensation. J&L has been listed in AM Best’s Preferred Providers Directory for Insurance Experts – Workers Compensation for over eight years. He recently won the prestigious Baucom Shine Lifetime Achievement Award for his volunteer contributions to the area of risk management and safety. James was recently named as an instructor for the prestigious Insurance Academy.

James is on the Board of Directors and Treasurer of the North Carolina Mid-State Safety Council. He has published two manuals on Workers’ Compensation and three different claims processing manuals. He has also written and has been quoted in numerous articles on reducing Workers’ Compensation costs for public and private employers. James publishes a weekly newsletter with 7,000 readers.

He currently possess press credentials and am invited to various national Workers Compensation conferences as a reporter.

James’s articles or interviews on Workers’ Compensation have appeared in the following publications or websites:

  • Risk and Insurance Management Society (RIMS)
  • Entrepreneur Magazine
  • Bloomberg Business News
  • WorkCompCentral.com
  • Claims Magazine
  • Risk & Insurance Magazine
  • Insurance Journal
  • Workers Compensation.com
  • LinkedIn, Twitter, Facebook and other social media sites
  • Various trade publications

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