How Claims Effect Your Ability to Purchase Workers Compensation Insurance

Workers compensation claims or losses have a direct impact on your ability to buy, purchase or secure a workers compensation insurance policy. I’m often reminded of this when contacted by an employer who, due to poor loss experience (translated as “he’s had too many claims”), is seeking help securing workers comp coverage because he’s being cancelled or non-renewed by his insurance company.

It’s a fact that insurance carriers look at profitability when making decisions about issuing or renewing policy coverage. Believe it or not they are in business to make money and when a policy can no longer do that, they will usually take action to eliminate their exposure to loss. That means when your workers compensation policy becomes unprofitable or it is determined that the opportunity to turn an account around and make it profitable is no longer viable, then they need to send you a packing!

The sorry fact is that it’s not good for either the insurance carrier or the employer. Workers compensation claims can be costly and can escalate out of control quickly. Having what would normally be considered a small injury blow up into a costly claim is not really that unusual. For the small employer, one paying only a couple of thousand dollars in premium, the room for profitability is small at best and when hit with a few claims it’s easy to reach the unprofitable mark and have your policy non-renewed.

What’s the average cost of a claim? Here’s a sampling from some Midwestern states as compiled by the Workers Compensation Research Institute for 2007-2010 experience period:

  • $26,138 in Illinois
  • $14,449 in Michigan
  • $20,763 in Wisconsin
  • $21,626 in Indiana

According to the Workers Compensation Insurance Rating Bureau (WCIRB) the average cost of a 2010 lost work claim in California was $65,000!

Lets put this into perspective. Say you are an employer based in Illinois with 5 employees and you pay an annual workers compensation premium of $4,200. You’ve had a workers compensation policy for 2 years with no claims. In the third year of your policy one of your workers is injured on the job and files a legitimate workers compensation claim. It turns out to be average and the total claim cost is $26,138 which your insurance company paid. Lets do the math:

  • 3 years of premium @ $4,200 = $12,600
  • 1 claim total cost = $26,138

Get the point? It doesn’t take long for claims or losses to make a negative impact. As a side note most insurance carriers will look at the profitability of an account on an annual basis. And in this example the insurance carrier may decide, depending on details surrounding the claim, to keep the policy.

Another example:

  • 3 years of premium @ $4,200 = $12,600
  • 1 claim total cost = $1,500
  • 1 claim total cost = $750
  • 1 claim total cost = $2,700
  • 1 claim total cost = $6,500
  • 1 claim total cost = $1,750
  • Total claim cost over 3 years = $13,200

Which example seems more of problem to you? Sure, it’s the second one. This is an example of claim severity to claim frequency. The first example is one of severity, the employer had several years with no claims and then one shock loss. Sure it was of significant value or cost but still a single claim. The second example is one of frequency, made up of smaller but more individual claims. You’ll typically find that insurance carriers will place more weight on those accounts with a frequency of claims problem than one with a single severe claim. Both have to do with profitability but the frequency problem may point to an ongoing uncorrected problem making the account less desirable to the carrier.

If an insurance company has non-renewed your workers compensation policy for claims or adverse loss history you will find it more difficult to secure coverage with another standard market insurance company. The reason? All insurance carriers will ask about your loss history. They want to see hard copy loss runs from your prior insurance carriers and if your account has been unprofitable and/or has had a history of severity or frequency problems they will more than likely decline to quote or write your new policy. And when you find no standard carrier will provide workers comp coverage your only choice for coverage will be the assigned risk plan, the pool, in your state.

So, watch those claims! Be aware how every workers comp claim turned in to your insurance company will impact your policy. If you have a question about how claims are effecting your workers comp policy contact an independent workers comp premium consultant!

Hope this helps you out!