Don't All Companies Charge the Same Amount for Workers' Compensation?

In an earlier post, I lamented that many clients (and some agents) feel the experience mod is uncontrollable.  Today I would like to discuss a similar sentiment that I hear too often.  Many clients (and agents) feel that the state rates and mod determine the premium and that is that.  No deviation.

It is true the state sets rates by class codes.  It is true your class codes are pretty narrowly defined meaning all carriers will use the same code and the same rate for your business.  In underwriting language, multiplying the payroll by the rate for the class code(s) and totaling it gets us a "manual premium".  The word manual comes from the "rate manual" as published by the state.

After we have a "manual" premium, we apply the experience modification.  Guess what we call the premium after applying the experience "modifier."  Yes, you guessed it, the "modified" premium.  Again, I concede the point that 95% or more of the carriers operating in Indiana will get to this same modified premium.  But that is not where pricing adjustments end.

In addition to the rates that are adopted by most carriers, the state sets out a schedule rating plan that is also adopted by the carriers.  This plan allows an underwriter to apply credit (or debit) to the modified premium based on specific characteristics of the insured they are reviewing.  The maximum deviation is 50%, though we aren't seeing those kind of pricing modifications in this market.

The reasons listed for the various credits are very specific.  In reality, pricing decisions are often made based on profitability evaluations, competitive reasons, and losses.  Then the specific discount is applied based on the amount of credit or debit needed to arrive at that price.

What it means to you is that all workers' compensation isn't priced the same.  If a carrier views your business as a good one, discounts can be applied.  Some companies are more liberal with discounts, and some are more conservative.

It is fair to say that these discounts are harder to come by the smaller the premium.  There isn't enough validity in the experience to justify additional credits when one loss could wipe out the profitability.  But if you have a large enough premium, and consistent enough loss experience, then your agent should be able to find you a carrier who can adjust premium accordingly.

How much credit should you expect?  Well most insurance companies are going to want a loss ratio at or below 50% on their book of business.  That means the most they will accept is 50% on your account.  Average your loss experience, and double it.  That is a premium target you could shoot for.  If your "modified" premium is greater than that, you might need to ask for some credit.  Just be sure to have the schedule rating plan memorized so that you can justify your request.

2014 Rate Changes

As previously mentioned, the overall 2014 rate change in the State of Indiana was a 7.7% decrease.  That average means very little to the individual client.  The rates on an individual class code could have changed up or down over 20%!

A few industries increased over 15% in their base rate.  Those include Window Cleaners (over 2 stories), rostered volunteers of municipalities, and a variety of manufacturers such as: Oil, pulp, battery, glue, and cottonseed.

A fairly new classification, inventory counters, was at the top of the list.  The fluctuation in that rate is somewhat expected as the experience will tend to even out over time.  The newness of anything being measured results in a a larger deviation as samples are added.

The winning class codes, with the most percentage reduction for the year, are

1. Asphalt Plants operated by the paving contractor  
2. carpet manufacturers.  

Both those codes saw a 33% base rate reduction.  The agent delivering those renewals should look like a hero unless the experience mod took a turn for the worse.

Following right behind those two codes with favorable base rate reductions were

1. Liquor Bottling
2. Architechts & Engineers
3. Pipe Mfg
4. Paperhanging.

All the standard exception classifications (Clerical, Drivers, Outside Sales) took a small rate reduction in between 5% and 10%.

So how exactly does all this information affect our clients?

While the rate reduction shows a positive trend in claims costs for the previous years, we shouldn't get too far ahead of ourselves in assuming all premiums are coming down for our clients.  If the advisory rate is down, then the expected loss rate is down too.  That means mods could jump slightly as the denominator has been reduced mathematically.

The converse is true when looking at the rate increases.  Those industries will probably have a drop in the mod, not counting the change in split rate that applies this year.

In the end, there is no golden rule in predicting an individual client's premium change based on rates.  Each case needs to be specifically evaluated, but that can be done about 120 days before their renewal. Researching their mod and the revised rates prior to your renewal meeting can put you in a position to be viewed as a proactive advocate on their behalf.

The data is out there, you just need to go look for it.

Can I Control My Experience Mod Part 4

So far in this series we have talked about correctly setting up your workers' compensation policy to reflect real exposure, controlling medical costs with preferred company providers, and maximizing use of alternative duty.  Now we are on to the last part of the control of claims and their impact on the experience modification.

The injured employee is back at work, the policy has actually expired and renewed, and for the most part the incident is forgotten.  Except for the fact that there is a reserve still open for some reason.  Very often insurance companies are slow to reduce reserves on claims that for all intents and purposes seem to be done and over.

There are many reasons for this and I will not place blame on the insurance company for any of these.  The fact that reserves are tax deductible for the insurance company is usually the first item identified by the anti insurance company contingent when addressing this issue.  While it is a true statement, and artificially high reserves will lower tax obligations, it also affects the Profit & Loss statement.  It is a tricky issue and the main reasons a reserve is still open are usually much more basic.

A claims adjuster is not going to look at a claim every day.  They are going to set follow up reminders based on their best expectation of when it needs to be addressed.  That may not be on your schedule, and it may be arbitrarily long.  So a worker who has returned to work and probably requires no more medical treatment could be followed up on in 30, 60, or 90 days.  The adjuster may default to 90 just to make sure nothing has come up.  No ill will, just good time management.

Additionally, they may be waiting on information from a doctor.  Rather than bugging them every 30 days, they may put their reminder in for a greater length of time.  They also don't want to reduce the reserve while waiting and then have to raise it back up again based on new information.  That would reflect poorly on their job performance.

My point is, what is right for the insurance company at this point, may be negatively affecting your experience modification.  If the report to the NCCI is due on October 30th, and the adjuster follows up and reduces the reserve on Nov 1st, the reserve will reflect in the modification calculation.    You need to know when the report will be filed, and be proactive in trying to get claims closed and reserves reduced prior to that time.  

I would imagine that a last minute phone call to the adjuster would be received poorly, while constant communication during the claim would engender their support.  I hear from clients more than ever that adjusters aren't keeping them in the loop.  Heavy workloads, busy schedules, whatever the cause, it is a reality.  You need to be proactive and make the calls if you aren't hearing from the adjuster.

The ICRB has a schedule of reporting dates, based on the expiration date of the workers' compensation policy.  I advise you to maintain a copy and set your own reminder to discuss reserves with the adjuster and the help of your agent.

This concludes this series, but only in brief.  For further information and assistance, please contact me and I will be happy to spend some time in person going through effective management of the Experience Modification Factor.

Can I Control My Experience Mod Part 3

In Indiana, an employee is not eligible for lost wages due to a work related accident until after they have been off for seven days.  That seems pretty straightforward.  An employee injured on Friday would be eligible for payment of lost wages only if they missed the entire next week.  

While that is correct, there are many nuances that come into play.  For example, weekend days count in the calculation.  If an employee misses Friday, then Saturday and Sunday count as missed days.  If an employee works Friday, Saturday and Sunday DO NOT count as missed days.

That's a key issue if we are trying to keep from paying for lost wages.  If an employee has to miss work due to an injury, try to make it not be on Friday.  Many injuries requiring medical treatment will require follow up.  However, with the use of a good alternative duty program, it won't require missed work other than doctor appointments.  Work with your employee, the physicians, and your insurance carrier to make sure those appointments aren't on Friday.

In all of this, communication is key.  Make sure the employees knows he isn't being penalized or taken advantage of in any way.  By providing him an alternative duty job, you are allowing him to be around his co workers and friends and stay in a normal routine, which may aid in healing.  By being in on Friday, he is helping the company, but also getting the chance to socialize with co workers about weekend plans.  The same goes for Monday.  Try to have them at work on Monday too.  I also suggest paying them for the days they have to go to the doctor, and having them report to work afterwards to update you on their status.

Even a serious injury, requiring surgery could result in no "paid lost work days."  Most surgeries anymore are one day stays. While it isn't feasible in every case, I could see an employee being at work the day after an outpatient surgery.  In no way am I mandating an employee comes in the day after surgery, or attempting to endanger their health.  If circumstances require, they need to stay home.  But again, in many cases, they can recuperate while fulfilling some function to the company.

When an employee is working in a light duty capacity, they don't have to be paid at their normal rate.  They can be, if you so choose.  However, the pay can fit the job they are doing.  If it dips below the 66 2/3% wage replacement they would receive under workers' compensation, then the difference is paid to them by the carrier.

In that scenario, we would lose the benefit of the 70% medical cost reduction.  But at that point, we are now saving lost wages from being included in the experience modification.  So a worker earning $52,000 a year would get $667 a week in lost wages payments.  If you pay them $10/hour to work 30 hours while recuperating, then you would cut $300 out of that payment.  That reduces the impact on your mod by 50% and the employee receives the same money.

There might even be a case to be made that they will recuperate faster and better by being in the company of employees and friends, doing some light work instead of sitting on the couch, and desiring to get back to their normal job.

In our final segment, we are going to talk about large reserves and their impact on the mod sheet.

Can I Control My Experience Mod Part 2

We previously discussed controlling the experience modification by accurately classifying employees to the appropriate job classification, therefore letting the expected losses be an accurate representation of the exposure. 

Now we want to discuss what happens once an accident has occurred.  I am sure each person reading this has a safety plan and a post accident process.  Issues like providing immediate medical attention, directing treatment to a company physician,  prompt notification to insurance companies, and accident investigation are all critical after an accident.

But let's talk in a little more detail about how to take steps to limit the cost of the claim both in real dollars spent by the insured and their carrier, as well as the dollars included in the calculation process used by NCCI.

First of all, utilizing a company physician, especially one included in a network used by the insurance carrier, can reduce costs in real dollars.  The ER is not the most cost effective choice and should be used only when necessary for the health of the injured worker.  Well prior to an accident occurring, arrange for a physician to whom injured employees must go for work related injuries.  In Indiana, the employer has that right, not the employee.  They can see their own physician at their own cost if they wish.

Prompt notification to the insurance carrier can allow you to utilize their expertise in directing treatment and utilizing network discounts.  Don't forget they are on your side in keeping real dollar costs low.

Once the immediate medical attention has been procured, and probably even before the investigation begins, you need to be thinking about cost mitigation in the form of early return to work or alternative duty programs.  While it may seem wasteful to a company to pay an employee for doing less than a whole job, it really pays off.  Here is why.

The experience modification calculation does not use all the medical costs in the calculation IF the employee receives no payments for lost wages or permanent loss of use of a body part.  In those cases with no lost wages, they only use 30% of the real dollar costs.  That is a 70% reduction in costs just by allowing for alternative duty.  

Providing alternative duty, especially in Indiana where the employee has to miss seven days of work prior to receiving an indemnity payment, can reduce future premium costs substantially.  Take for example, an insured with a $1,000 medical claim.  With no lost time, that will only reflect as $300 on the experience modification.   The impact on the experience modification may only be 1 point, but even at a $2500 premium, with that loss affecting 3 experience mofidifcations, that would be $750 of additional premium.

Alternative duty is a tricky issue to deal with, especially with the increased ADA (Americans with Disabilities Act) enforcement.  "Creating" a job for an injured worker could get you in trouble with the ADA.  That is why a formal alternative duty program needs to be created ahead of time to allow for utilization when needed.  Insurance companies, private companies like Safemetrics, and other resources are available to develop these plans.

In our next update we will talk more about how to maximize the seven days provided under Indiana law to maximize the benefit.

Can I Control My Experience Mod - Part 1

Too often I hear that an experience modification factor is prepared by the state, and there is nothing a client can do to control that factor.  I would like to discuss what I believe to be two erroneous points in that statement.

First, the state doesn't prepare the experience modification factor.  In Indiana, there is an Indiana Compensation Rating Bureau which is charged with administering the workers' compensation rates and experience modification program.  However, they rely on the NCCI for statistical calculation and preparation of the actual experience modification.

Second, insureds have a great deal of control in influencing the experience modification factor.  I am a math nerd, so I Iove the calculation formulas and get geeked up about looking at the possible fluctuations of an experience modification factor. However, I recognize most of my audience will not be as geeked up as I am and so I will try to keep the math to a minimum.

Let's examine at a high level what an experience modification factor calculates. In brief, it compares three years of loss experience for a company to the same three years for all companies in the state that are in the same industry as the client.  By averaging all the experience in the state, an EXPECTED amount of losses (in dollars)  is generated.  By dividing a company's ACTUAL losses by the EXPECTED losses, we arrive at a factor known as the experience modification.  If the losses are better than average, the mod is below 1.00.  If losses are worse than average, the mod is above 1.00

That brings me to the first point that can be controlled by an insured.  Increasing the amount of EXPECTED losses will by definition lower the experience modification given the same amount of ACTUAL losses.  How, you might say, would I increase my EXPECTED losses?  EXPECTED losses are calculated by applying payroll to the rates for class codes that are assigned to a company.  Class codes are the numerical codes assigned to an employer based on the duties performed by their employees.

While there is a pretty strict interpretation of the eligible class codes for a given business, there is still some wiggle room.   Most decisions to place employees in a particular class code center around getting them in the cheapest code that is possible.  I would argue that is wrong.  First and foremost, place them in the correct class code according to their duties.  When there is a grey area, and therefore a decision to be made, choose the higher rated class code.  The additional amount of premium charged can be offset by the lower experience modification factor.  

I personally worked with a client to get their entire operation reclassified by the ICRB with the express purpose of getting them correctly classed and lowering their experience modification.  At the end of the day, an underwriter will be looking at hard dollars that need to be collected.   In this case, the underwriter agreed to a premium amount, and after all the changes the client payed the same premium, but was in a position to be more attractive to other underwriters due to the lower mod.

If your premium is artificially low, but the experience modification is high, that doesn't look good. When assessing class codes assignment for employees, I recommend you use the code that contemplates the majority of their work, even if it is the higher rated code.  

Next, we will talk about how I can affect my mod once a claim has occurred.  Stay tuned.