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.
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.|
|$5,000 – $100,0000||10.9%||3.5%|
|$100,0000 – $500,000||12.6%||5.0%|
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:
- 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.
- 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.
- 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.
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