How can a business reduce the net cost of Workers Compensation coverage?
Workers Compensation is a unique class of insurance, requiring an even more unique pricing system. Unlike Property coverage that is objective in nature, or General Liability insurance that is subject to both subjective and objective risk factors, Workers Compensation tends to be more subjective. The risk is heavily influenced by workplace conditions, but morale plays a crucial role. More than other types of risk, claims much too often result from moral issues; this is when employees fane or exaggerate injury. The author feels that happy employees are far less lightly to have injuries than those employees that are unhappy or disgruntled. His favorite comparison is that an unhappy worker will hurt themselves in a padded cell, but a happy employee can walk through a minefield, unscathed.
For most of the country, rates are calculated by the National Council for Compensation Insurance (NCCI), based on the claims experience for each homogeneous class of exposure. This broad basis indicates an average or standard rate based on the pure cost factor, individually for each State. If the cost for rehabilitating a broken arm in State A is 10% more than in State B, then the premium for State A would reflect that additional cost. Beyond the pure premium calculation, statistical factors are employed to raise or lower the rate, based on the individual loss experience of a risk within, the respective class of exposure. This method of modification is considerably influenced by statistical principles known as the Law of Large Numbers. Essentially, there is more accuracy with large number of employees compared to losses when the employee count is low. Frequency of claims or incidents are also is shown to influence the modification more that Severity of loss, in calculating experience modification.
So, we see that Experience modifications are developed by relatively complex math calculations. A basic understanding of how it works may encourage effective loss control practices, thereby lowering your premiums. Let us look at how it works. A company qualifies for experience rating if the premiums are large enough to develop the necessary credibility. In Florida, this threshold requires premiums for the previous two years to be $5,000.00 or more, or the last year's premium was more than $8,000.00. If there is no recorded experience, the modification is maintained at 1.00. Experience data comprising of premiums and losses for up to three year, not including the most recent year is used in the calculation. Put another way, this experience period begins one year prior to the current anniversary rating date and goes back four years. For example, your 2020 rating will be based on your claims experience for the years 2017, 2018, and 2019. It is necessary for the claim to have some maturity before it is used in the modification calculation. Claim reserves are relatively higher before the potential cost is better known. Simple injuries can result in higher costs than initially anticipated, conversely injuries that appear serious at first can heal better than expected. The claim reserve follows that
pattern. The National Council for Compensation (NCCI) will make the calculations based on the data supplied by your current and prior insurers. The resulting factor is used to multiply your "Manual premium". This modified premium produces a Standard premium.
What does all of this mean? You will be charged higher premiums if you have poor loss control results. Poor loss control and poor safety standards WILL lead to losses. It would be an error to think that because you have not had losses in a long time your operation is safe. An experience modifier could make a $10,000.00 premium become $15,000.00 or $7,000.00 (examples). It could vary either way, depending on whether losses were better than average or worse than statistical average for the class of risk. Additional sales are required to pay for losses. The following table will help you figure out just how much additional sales you would need to pay for increases in premium (based on your % profit margin).
This table only shows the effect of direct cost on your profit. Indirect costs are estimated to be 3 to 4 times the direct cost. Indirect cost could include the cost of another employee's production time while they are diverted to process a claim. It could include the cost of help in doing the job of an injured worker, or the cost of lowered morale. An inadequate workforce can be costly in terms of customer dissatisfaction. Injured workers generally produce lower morale.
How can you lower your experience rating and save money? Get your agent at AIS a call to set up a formal safety program.
Follow the program diligently; prevent injuries. If there are injuries, bring injured employee back for modified work (as prescribed by their doctors). You need not pay at the regular rate or give full time work. Every dollar incurred for benefits goes toward calculating your modifier. Make every employee responsible for safety. Safety should be part of a supervisor's performance appraisal and the appraisal of all workers.
For more information about Workers Compensation, please visit the Florida Association of Insurance Agents website.