For such a simple insurance product workers compensation can cause so many problems! And one of those persistent problems for many employers is the seemingly never ending increase in premium some of them get to face every day. Truth of the matter is that in today’s workers compensation environment we are seeing overall reductions in cost on a very broad scale. But that hasn’t slowed the questions we receive from employers about how to keep their workers compensation premiums from going up. So in this blog we’re going to explore the who, what, when, where and why workers compensation premiums increase, even though we may be in an environment of overall rate reductions.
Hopefully you’ll gain a better understanding of the driving forces at work that lead to increased workers compensation premiums and will be better prepared to handle them when they occur.
Contrary to what seems popular belief, workers compensation is a very dynamic insurance product. It’s a product that’s influenced by many diverse factors. Some of those factors are very broad and may impact on a state level. Others are very specific and are directly related to an individual employer’s specific situation. Regardless the source, they all, in some way or other, contributes to increased costs that are passed along for the employer to shoulder.
Some of the very broad factors include:
Individual State Legal Environments – The regulatory environment, from a workers comp perspective, is always in flux. Changes made at this level may certainly have an impact on the costs an employer incurs. 2017 is lining up to be no different. We expect to see a number of states proposing a variety of changes to their individual work comp systems that may have a positive or negative impact on the system. Of course costs an employer may incur may well be tied to the changes state legislatures enact.
Cost of Medical Services – No doubt we’ve gained enormous positive strides in our society through advances in medical procedures, development of new drugs and disease/injury treatment. The reality is that those advancements come at increased financial costs. Better treatment for injured workers is a positive advancement however those increased medical costs must be addressed in the worker’s compensation system. Increased claim costs have a direct impact on the financial outcome of any insurance company and will ultimately lead to increased premiums. However we must consider that as medical advancements and improvements continue to be made we may see resulting offsets in lower lost time accidents ultimately reducing indemnity costs associated with work comp claims.
Insurance Company Competition and Market Share – Never underestimate the competitive nature of an insurance carrier! Competition and market share often drive premiums for carriers who find themselves in an aggressive mood. When an insurance company wants to grow their market share not much will get in their way. Sometimes this is good for an employer and sometimes not! What you typically find is that the long tail costs associated with workers comp claims (this is where it can sometimes take years for a single claim to catch up and mature in claim value) will catch up those carriers who may be artificially under priced with the notion of securing market share.
State Mandated Benefit Revisions – Keeping up with the times. Individual states must monitor and adjust injured worker benefits to be able to provide a reasonable level of acceptable care for their workers. While not all changes in state benefit levels may result in increased workers comp costs, those that do must be addressed within the workers compensation system.
Insurance Company Profitability and Performance on a National Basis – While 2015 ended up being one of the best national performing years for insurance carriers since 2006 by coming in with an overall combined ratio of 94% some individual carriers may not have fared as well. Those carriers who underperformed as compared with others may need to reevaluate their pricing position in the workers comp arena. This reevaluation may result in their individual companies having to tighten the acceptability of new insurance clients into their programs. Premium costs their employer clients pay may certainly be tied to their overall financial performance.
Some of the individual employer factors include:
Size of the Business in Question – It’s about options. Large employers with many employees and extensive financial resources have options when it comes to meeting their workers compensation obligation to their employees. Contrary to this, small employers with few employees certainly have limited options. Whether an employer’s business is large or small will have a great deal to do with their individual ability to control their workers compensation premium costs.
Policy Structure and Coverage Options – For the large employer, policy structure may lead to options in securing coverage and coverage design. Those options may include the use of: Self Insured Programs, Captives, Large Deductible Programs and Retrospective Rating Plans. All of these focus, in some manner or other, on the financial management of the individual employer’s workers compensation program. All of these require a high level of financial expertise not available to the average small employer. For the small employer options are much more limited. Small employers may be able to take advantage of some state offered small deductible plans but for the most part are limited to guaranteed cost programs. And when limited to guaranteed cost plans you’ll find they are much more susceptible to the insurance carriers
Individual Employer Experience Modification Rate (EMR), Claim and Safety Management – Not all employers are experience rated. In fact there’s a threshold established by individual states for an employer to become eligible for experience rating. That threshold usually runs somewhere between $2,500 and $10,000 in premium. Once an employer becomes eligible for an EMR all claims they incur will play a big part in the pricing of their workers compensation policy. This comes in the form of a rating factor that’s applied to their premium formula. That factor could range from .70 or lower to 1.80 or even higher all depending on the actual claims that individual employer has incurred. Claim and safety management and an employer’s ability to incorporate the techniques found within these categories into their workers comp management practices ultimately lead to better EMR management. Those small employers not experience rated face another totally different situation than those who qualify for an EMR. For small employers, those looking at small annual premiums that would be below the EMR qualification level, their individual challenges have more to do with being able to secure coverage and keep coverage than worrying about how much it costs! Small employers are almost totally dependent upon the kindness of the insurance company machine. Think about it. An employer with a $2500 premium has an employee who suffers a serious back injury that carries a cost of $50,000. How can that insurance company ever recover the cost of that one single claim? They can’t. And that’s what puts those small employers in peril. That’s why so many small employers find themselves with limited or no coverage choices but the assigned risk (pool) plan available in their state.
Employer Classification and Hazard Exposure – Of course the premium an employer pays will have a great deal to do with the level of hazard found within their operations. In real simple terms, workers compensation rates are statistically developed by taking loss costs, as published by individual rating bureaus like NCCI, by classification code and adding the insurance company load factor (insurance carrier profit and expenses.) This is why in competitive states you’ll find different rates between insurance carriers for the same class code. Class codes that represent high hazard exposures will naturally carry a much higher rate than those representing lesser hazards. It’s easy to understand. Just think about the high steel iron worker building sky scrapers as compared to an office worker. It’s easy to see the big hazard exposure difference between those two occupations! So employer classification and hazard exposure can have a great deal to do with the premium an employer pays.
Here’s a few tips any employer can use to help control their workers comp premium:
Implement a Strong Safety Program – You don’t have to be a giant corporation with many employees to have an effective, workable safety program. The goal is simple. Zero claims.
Eliminate Claims – We know how workers compensation claims can affect an employer. As I mentioned above the goal for any employer should be zero claims! If your company has experience deteriorating experience modification rates, EMR, you need to take a close look at how your claims are being handled. This may involve re-working your entire attitude towards claims! Claims can ruin an employer. They require diligent effort, proper management and employer involvement.
Choose the Best Insurance Program for Your Business – Consider coverage options like deductible plans, dividend plans and other methods of meeting your statutory obligation like self insurance, use of captives and retrospective rating plans.
Work with a Knowledgeable Workers Compensation Insurance Agent – This may be the best option for small employers! Agents will monitor the market place, are good at shopping for appropriate coverage and understand the behind the scenes issues that drive access and availability of coverage for the employer.
Use Outside Resources to Verify Rating Elements on Your Policy – We’ve already mentioned classification codes and the importance of them being correct on your policy. Changes in business operations may create necessary changes in your classification. Changes or modification may result in additional codes that may be more descriptive of the new operations. These codes may carry lower or higher rates just depending on the type of change. It’s always a good idea to have an independent consultant take a look at your classification codes to verify accuracy.
Monitor Changes in Your Rating Payroll – Increases in rating payroll will result in a direct increase in the cost of your workers compensation policy. Rating payroll is what’s used as the exposure base in calculating your premium. Classification codes are presented with a rate per $100 of rating payroll.
Verify Your Audit – Audits should represent your operations at the time of the audit. Be careful with this one. Many employers misunderstand the importance that audits play in the entire pricing mechanism. Audits should always be completed and if you need help reach out to an independent audit specialist for assistance. If you have questions about the accuracy of a completed audit check in with an independent worker’s comp consultant.
Keep in mind that those items found in the broad factors category, while they may have an extreme impact on overall pricing, actually have very little to do with an individual employer’s specific situation. Think of them as an overall influencer but for the most part remain out of the individual employers control. While on the other hand the individual employer factors are the ones an employer can maintain some control over.
There you go a few reasons why your workers compensation insurance premiums go up. By far not all of the reasons! However by now you should now have a good sense of the complexity of this so called “simple insurance product!”
I hope in some way this post has been helpful to you and thanks for reading!