J&L Risk Management Consultants
Work Comp expert witness reserve reviews premium audits for employers
This 4-minute video is well worth your time. The video is from C3 Insurance Academy. You can reduce your viewing time to three minutes if you do not wish to see the alternate shortcut way to figure your premiums. This is a great job by C3 Insurance Academy.
I sometimes find videos on YouTube that are worth watching on Workers Comp. This would be one of them.
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The total work comp premium written for 2014 increased 5.6% over 2013 to $46.8 billion according to AM Best. These figures were part of the Top 25 Workers Comp carriers for 2014 report issued annually.
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Two carriers doubled their net premiums written (NPW):
I am not sure why the two carriers decided to increase their NPW so dramatically. Could this have resulted from picking up insureds from Liberty and other carriers which wrote less premium than in 2013?
As expected with an announcement earlier this year Liberty Mutual decreased its NPW by over 27%. This may be due to a more selective renewal process.
Two state funds that only write domestically (in their own state) ranked in the top 10.
Colorado’s Pinnacol increased its NPW by over 18%. The trend of state-based domestic carriers significantly increasing NPW will be have to be monitored closely.
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Should Workers Compensation Premiums be considered as a tax? Premiums and taxes are similar in some respects. Workers Compensation premiums and taxes are also very different when compared to each other.
One of the ways that premiums and business taxes differ greatly is that premiums are regressive. As more payroll is covered in an employer’s account, the unit cost of providing those benefits reduces more than proportionally.
The business tax system is progressive. As business or personal income increases the per-unit rate of taxes increases up to a prescribed amount.
The more a corporation or individual earns results in a progressively higher tax rate. WC premium rates are not structured in that manner. The larger employers tend to pay less per unit for WC premiums.
The WC system is structured as regressive due to larger employers tend to hire safety personnel. A large amount of payroll can absorb a large or many claims much easier than smaller employers.
For instance, a $200,000 claim with an employer that has five employees cannot absorb the risk like a major corporation with 450 employees. Such is the nature of risk.
Taxable income over Not over Tax rate
$ 0 $ 50,000 15%
50,000 75,000 25%
75,000 100,000 34%
100,000 335,000 39%
335,000 10,000,000 34%
10,000,000 15,000,000 35%
15,000,000 18,333,333 38%
18,333,333 .......... 35% This is the Table Table for Married IndividualsFiling Separately - 2014:Taxable income: Tax: Over But not over Tax +% On amount over $ 0 $ 9,075 $ 0.00 10 $ 0 9,075 36,900 907.50 15 9,075 36,900 74,425 5,081.25 25 36,900 74,425 113,425 14,462.50 28 74,425 113,425 202,550 25,382.50 33 113,425 202,550 228,800 54,793.75 35 202,550 228,800 ....... 63,981.25 39.6 228,800
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The six ways to leverage your Workers Comp premiums are listed below. Workers Compensation is almost always considered an expense. What if an employer decided to analyze WC as an investment?
The definition of leverage in this case is borrowing or using other funds to increase the rate of return on an investment. How does one leverage Workers Comp premiums? The following ideas on leverage are based on Workers Comp as an investment. They will not work when viewed as an expense.
1. Self-Insurance – by not paying the insurance company’s fees and overhead, the employer can retain this capital to invest elsewhere. This is a great way to reduce capital outlays if an employer does not experience a spate of bad accidents. The risk and reward are both high.
2. PEO’s (Professional Employment Organization) An employer can leverage their premium outlays by the pay-go concept. Workers Comp is only paid as payroll is incurred. There are no huge outlays upfront. PEO’s are one of my favorite risk-shifting techniques.
3. Large deductibles – basically modified self insurance. The main difference from self insurance is the carrier will still report Mods to the rating bureaus. The claims handling fees can be much more expensive than with pure self insurance.
4. Examine past policies and audits – recovering already expended funds can be looked at as “found money.” Employers are able to reinvest these funds into the company. One of the lower risk high returns of Workers Comp.
5. Safety Enhancement – while some employers consider adding in or enhancing a safety program as too expensive, we have seen a 4 to 1 return on investment when a new or improved safety program has been initiated. Keeping employees safe and out of the claims system reaps rewards for all involved.
6. Captives – the “cutting edge” method of leveraging premiums. Offshore captives allow for certain tax benefits. Employers are able to use funds that would have been invested in premiums in other parts of their business. There are many options for employers using captive arrangements.
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We are starting to notice a trend between your company’s initial deposit premium and the final premium audit bill. The deposit premium is just that – a deposit to bind coverage. We hear from many company owners and risk managers that what they expected to pay for the year is quite different – causing a budget shortfall.
There are many reasons for the final premium not being what your company has expected to pay for Workers Comp coverage for the policy year. Some of the reasons are:
Another caveat (I use that word often), is to never start a dispute unless you know the basis for why you are disputing your final bill. Exclaiming that you just feel that your company paid too much often ends up with your company having an even larger premium bill. I have a file on my desk right now that is proof positive of this situation.
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Workers Compensation premiums of any type are almost always viewed as an expense. I actually changed my career path due to the question in the title. Workers Compensation premiums should be viewed as an investment, whether a company pays premiums or is self-insured.
Mark Walls, who runs the Work Comp Analysis Group on LinkedIn recently wrote an article on the upcoming Workers Compensation changes in 2013. One of the passages in the article reads as:
If you get the time, the Work Comp Analysis group in LinkedIn is worth following on a weekly or daily basis.
I do hope that more companies will view Workers Compensation as an investment. The old “a penny saved is a penny earned” would be very applicable.
The return on investment (ROI) is that saving Workers Comp premium allows an employer to reinvest those funds directly back in their budget.
That is one of my reasons for changing my insurance education from a CPCU to a ChFC track. The ChFC curriculum allowed me to analyze insurance as an investment. Workers comp premiums that are treated as expenses get rolled into one expense category such as insurance program expense. Once employers begin treating premiums of any type as an investment rather than an expense, the justification for WC risk management techniques become much more valuable.
Once an employer sees workers comp premium as investments with the insurance carrier, safety programs then become a justified investment to make to save a company’s budget.
Employers that wish to reduce their future liabilities are willing to pay sums at the front-end of claims to avoid the “claims snowball rolling down the hill.” Loading up the risk management techniques at the start of a claim will always pay off in the long run by saving on workers compensation premiums.
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A reader recently asked – Does a Workers Comp accident and an auto accident affect the policyholders’ premiums in the same manner? The answer is yes and no. Let us look at some of the similarities and differences.
Workers Compensation and auto accidents both increase the premiums paid overall. They both use the Total Incurred (Paid + Reserves) as main determinant of how much premiums will be charged in subsequent policy periods. Both types of claims affect the policyholder’s premium for at least three years at the time of renewal.
Even though the company may have installed safety measures, the final effects will take up to four years to be realized. The same can be said for auto accidents. Even if the driver is safe for three years, there is still an extra premium to be paid due to the level of increased risk.
Workers Comp and auto accidents will both carry over to another insurance carrier if you decide to switch. No carrier will ignore your accident record.
One of the main differences in Workers Compensation is that the claims staff is given an extra six months after the policy expires for claims development. The most recent policy period is not affected in Workers Comp. As I have posted many times in the past, Workers Compensation is a delayed system when calculating a premium figure.
There is no audit process in auto insurance. No company or person will ever audit an auto insured such as in Workers Comp. I have never heard of an auto insured having to pay extra premium for a prior year.
This was a rather “quick and dirty” comparison.
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A Bad Economy affects Workers comp premiums in varied ways. I have read a few articles on the effect that our current sour economy has had on insurance such as an upcoming hard market, lowering claim numbers, etc. I thought I would cover five ways that Workers Comp is being affected presently.
Employers may be severely overpaying for their Workers Comp premiums upfront at the time of policy renewal. I have written a few prior posts (one here) on policy premiums. As an employer you can possibly be giving your insurance carrier a 0% interest loan for a year. If your payroll is decreasing are you basing your payroll numbers on prior years? That could be a costly error.
Claim numbers are down, but the cost per claim has increased to offset the claim number reductions.. Along with this fact is the small claim number “bumps” that have appeared in every state. These bumps may likely be due to laid-off workers filing claims for injuries they have been working with over the years and just put up with them or laid off workers have run out of unemployment benefits and are just trying to make ends meet.
The quickest way to combat these effects is by becoming more involved with your Workers Comp insurance plan. That is and has always been the quickest way to reduce your insurance costs.
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Your Workers Comp premiums -Immediately lower them for your company. This is probably the question that I am asked most often at presentations, conferences, and meetings.
There is no “quick fix” for your Workers Comp premiums. Reducing your companies premiums takes at least three years of constant effort. As Workers Comp is on more of a delayed system, anything that reduces the reserves will not show up in your premiums until two policy years later.
One of the best ways to reduce your premiums is to institute a new safety program or enhance one that is already in place. Preventing accidents is the best way to reduce your premiums and will have a long-term effect on premiums. Almost all states offer assistance in Loss Prevention from educating employees to safety DVDs. Check with your local department of insurance or industrial commission. You may be surprised what is offered for free.
Another way to quickly reduce workers comp premiums is to heavily review your Workers Comp premium audits. We have seen companies just write checks without questioning the premium audits. If there is something that does not look or feel right, you have the right to have the audit explained to you in detail by the auditor including classification codes, payroll (remuneration), and any other areas of the audit.
One area that most companies do not attempt to question is their Workers Comp loss runs. If you are not receiving your loss runs monthly, call your agent, or insurance carrier and ask to receive them monthly. Most insurance carriers will offer to send them quarterly, but you need to review them monthly for changes in reserves. Having online access to your claims info is critical. When shopping for a carrier to renew with, ask that your agent inquire to see if the company she/he recommends has online access to your claims.
Even with all the technology that is in place, there are a few carriers that do not allow access to your claims info. Having this access may be worth paying a little extra over the lowest-priced carrier. This will also save your company a large amount of $ if you decide to have a company such as ours to review your claims. Most companies that allow online access will have a place for status updates. Those are golden as you can review those quickly to have an idea of how the claim is progressing. If you do not agree with or have questions on the loss runs, you should email (not call) the adjusters that are on the files.
Questioning everything that comes across your desk in relation to your Workers Comp policies is always the best thing for reducing your Workers Compensation premiums.
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Yes, they are all different. Workers Comp file premium reserve reviews are three very different reviews that we perform for employers
I have posted on this issue more than a few times. This is most of what we do for a business. I felt the need to re-post on the subject as we receive questions daily on file premium reserve reviews. Employers, agents, and others are sometimes confused by the terms.
Premium Review – this is where we actually confirm all the premium calculations and the structure of the calculations. We examine areas such as classification codes, E-mods, original Workers Comp policies, year-end audits, etc.
Quite a few of our clients are now requesting E-Mod reviews. This is where we assist in lowering the E-mod or getting a company out of the Assigned Risk Pool. There are many areas where a company’s Workers Compensation premium payments may be reduced. We see so many companies just writing a Workers Comp premium check without questioning how the payment was calculated. Questioning the $ you pay out is the best place to start a Workers Comp premium reduction program.
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We received a few questions from our article readers on Workers Comp premium. What is the one thing that I can do to quickly reduce my Workers Comp premiums?
I wish there was a quick-fix for paying less Workers Compensation premiums. There is a one-year lag time between anything a company does today and those actions affecting the E-Mod. Taking actions today is a start, but it needs to be a long-term goal. An action plan has to be put in place ASAP and then followed for three years to really have an effect on the E-Mod.
As I have mentioned in prior blogs, the first thing to do is to quit writing Workers Comp premiums checks without understanding the premium bill. If it is a bill from the initial policy, then review every page of the policy and ask questions.
If the premium bill is from a Workers Comp audit, then make sure it is accurate. If there are any questions about the Workers Comp policy or audit, there is a time limitation for disputing the premium bill. Most of our initial contacts from employers are due to “Something just does not seem right – a gut feeling.”
The bottom line is to not just write a check and consider it an overhead or fixed cost. Workers Comp is a variable cost. One of our favorite sayings is “Stop writing checks and ask questions.” If you do not feel comfortable, do not hesitate to bring in a premium, reserve, or claims expert. It will almost always prove to be money very well spent.
I blogged “Red Flags That You May be Overpaying for Workers Comp” a few weeks ago. Check that one out. If you ever have any questions, please feel free to email me at [email protected] or call us.
Up Next – Back to North Dakota’s Workers Comp Conundrum
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