Part 1 of a 2–part series. Coming in April: Reducing workers’ comp claims by improving safety
Many employers have a love–hate relationship with workers’ compensation insurance. While the program protects business owners from lawsuits for workplace injuries, the required premiums can threaten profits.
“The cost of workers’ compensation is a huge concern for most employers,” says Ed Priz, president of Advanced Insurance Management, an independent insurance auditing and consulting firm in Chicago. “In some regards, it is more of a widespread problem than health insurance.”
Unlike that optional medical benefit, workers’ comp is mandated virtually throughout the United States, though some states exempt the smallest of employers.
Cut your costs
The foremost problem is, of course, the size of the premiums.
“Outside of health insurance, workers’ comp is the most expensive insurance policy the typical employer buys,” says Scott Simmonds, an insurance/risk management consultant and author of Simmonds on Workers’ Compensation: Advice to Control Your Premium and Losses.
Workers’ comp also seems to be the most problem–prone: “Everyone seems to have a horror story either on the premium side or the claims side,” Simmonds says.
Experts say the most effective way for employers to shave costs is to spot errors in the way premiums are calculated.
“The insurance industry makes a lot of mistakes in providing workers’ comp insurance,” says Priz, whose job it is to spot overcharges in his clients’ paperwork. “I find that one–third to one–half of the time, the client has been overcharged somewhere along the way. That’s a significant error percentage.”
One of the costliest errors is misclassification of employees. In the workers’ comp world, different classes of workers are assessed different premiums, which reflect injury risk.
“There are more than 900 classifications for employees and rates are all over the place,” Simmonds says.
While actual premiums vary widely by state, clerical workers have less risk of injury and are thus rated relatively low—with a premium often as little as 60 cents for every $100 in payroll. A manufacturer or retailer, on the other hand, might pay $5 to $6 per $100 of payroll for its employees. And premiums for construction workers can go as high as $25 to $40. Find out how your own employees are classified.
“Normally you can request a copy of your audit worksheet from your agent, who passes along the request to your insurance company, which then sends the report directly to you,” Simmonds says. (The direct carrier–to–employer contact is intended to avoid having your private payroll information revealed to your agent.)
Check your records
Your workers’ comp premiums are based on another factor: your claims history. Insurers compare the number and severity of your workplace injuries to those of similar operations in your industry. The resulting ratio is your “experience modification” or “x–mod” for short. The lower your x–mod, the lower your premiums.
“Many business owners aim for an x–mod of 1.0, a figure which indicates your claims are no higher or lower than the average,” Simmonds says. “To me, though, that’s like getting a C grade in school. I urge my clients to try to do better.”
How can you lower your x–mod? The first way is to tally up your own history of claims and compare the results with those on your official x–mod worksheet. That document outlines the losses you have had, specifies your total payroll and provides the calculations that result in your x–mod. It’s prepared by an agency called the National Council on Compensation Insurance, which then provides it to your insurance carrier, who, in turn, forwards copies to your agent and to you. Calculating your x–mod can be complicated, but taking the time to do so will assure you of the accuracy of the figure assigned to you by your carrier.
Improve safety
You also can reduce costs by instituting a safety program that brings down your accident rate. Obtain feedback from your workers on ways to make their jobs accident–free and institute their suggestions.
Using safety programs and other techniques, some employers have lowered their x–mod to 0.8 or even 0.6.
“The lowest x–mod I ever saw was 0.48,” Simmonds says. “That was for a county government in Pennsylvania. They had a tremendous program of loss control—and great luck.”
Smaller businesses often are not assigned x–mods. That’s because, from an actuarial standpoint, the data available are insufficient to make a meaningful calculation. At what point does a growing business enter x–mod territory? There is no one rule: The trip point varies widely and is affected by the employee classification mix.
But Simmonds offers this benchmark: “Generally speaking, if you are paying more than $5,000 a year in workers’ compensation premiums, then you have most likely been assigned an x–mod.”
By way of rough example, an employer with two or three employees in low–risk positions might pay around $2,000 in premiums; one with 15 to 20 employees might pay $8,000 to $9,000. If your business is too small to be assigned an x–mod, you still can benefit from a favorable workers’ comp claims history.
“If you have few claims, use the competitive–bid process to pressure your insurance company to provide you with credits that result in lower premiums,” Simmonds says.
Report injuries
Because workplace injuries affect workers’ comp premiums, many employers are tempted to avoid reporting accidents. That’s bad.
“Failing to report a workplace injury is illegal in virtually every state,” says Ron Peters, a partner in the San Jose, Calif., office of Littler Mendelson, a labor and employment law firm representing management.
But there is an exception: You don’t need to report minor injuries that require only first aid.
“If you are in the habit of reporting first aid–only injuries, then you may end up paying higher premiums than necessary,” Peters says. While such reporting may seem counterintuitive, the fact is that employers often report minor injuries because of fear that they may turn into something more serious.
“Employers can get nervous because sometimes it’s not easy to identify a serious injury,” Peters says.
Shop for a deal
When it comes to workers’ compensation insurance, shopping around can make a huge difference in premiums.
“One of my clients recently experienced a 30% drop in his workers’ comp premium, even though his payroll had increased by 8%,” Simmonds says.
The reason? “He had not been shopping around for over six years and didn’t realize that new insurance carriers had entered his market offering lower rates,” Simmonds says. “Suddenly his current insurer, afraid of losing a good customer, lowered his rates because of competition.”
Your short list of candidates can include carriers who have sold similar coverage to others.
“Talk with friendly competitors,” Simmonds suggests. “Find out who they are doing business with.”
Prudent shopping means comparing brokers, as well as carriers.
“The broker you choose can make a big difference,” Priz says. “Some agents give the impression they can access the whole market and get quotes from all kinds of insurance companies, but that may be misleading. Often agents have contracts with only a handful of companies and can really only market to those. As a result, you might not get the best fit. So you need to talk with several different insurance agents to make sure you are thoroughly covering the available options.”
There’s another weapon in the cost–cutting arsenal: Insurance policies with high deductibles. Not all states allow such policies, however. And, even in states that do, not all insurance carriers sell them. Again, shop around.
