Employers change their workers compensation insurance company for several reasons and we’ll save those reasons for another time. But in this post we’ll talk about problems that often crop up when an employer moves from one insurance company to another.
Probably the best way to present this information is to just list some of the more common problems that we find many employers experience when changing workers comp carriers. So here goes!
- Changed Classification Codes – Class codes are the primary driving force in the pricing of a workers comp policy. Get it right and the codes will accurately represent the work exposures of an employer and the employer will pay the correct premium for what they do. Get it wrong and the employer will either over pay or under pay. From an employers stand point having a “better” code will often mean one that carries a lower rate. Insurance agents and company underwriters must tread lightly when their client, the employer, starts talking about finding a code with a lower rate. Class codes are complicated and assignment of a code is not as simple as it may at first appear. Changed codes on a policy from one year to another is an indicator that something may be wrong. Lower rated, different class codes used by a new agent may only trigger problems at audit time. Just be cautious when it comes to modifying an employers classifications.
- Reinterpretation of Classification Codes – You can bet that from one insurance company to another there will be a difference in how they interpret an employers operations and how they interpret the class codes used on the policy. Simply put, if you change insurance companies then you open yourself up to allow the new insurance company to reinterpret your business operations and the codes that should be assigned. Whereas the insurance carrier you may have had in the past has become complacent, your operations may have modified and you were receiving the benefit of an incorrect lower code. Is it right? No. Does it happen? Yes. So by moving to a different insurance company, usually under the sometimes misguided intent to save premium, the employer may be surprised at audit that higher codes are assigned and their premium has actually increased.
- Misapplication or Assignment of Payroll – When remuneration, payroll, is assigned to an incorrect classification code the premium an employer will pay is incorrect. Changing insurance carriers will often result in a rearranging of payroll. Sometimes when a policy is first set up by the agent, underwriter and employer, payroll will be shifted from a more accurate classification into another possibly incorrect class resulting in a lower premium at the beginning of the policy. Not a problem until the new auditor comes along and discovers the error, and reassigns the payroll into the correct code with the ultimate effect of causing an increase in premium at audit time.
- Incorrect Application of Rules of Remuneration – Take a quick look at what is included as “rating payroll.” The actual term used in our industry is remuneration. Why? Because the rating exposure for a workers compensation policy is actually based on much more than payroll. In fact, payroll is just a single item under the broader topic of remuneration. Here’s a quick story. We worked a case where we were contacted by the insurance broker for an insured who had received a significant ($300,000)additional premium generated by their audit. The insured had been with their previous insurance carrier for many, many years. They had the same auditor for all or those years. The broker changed carriers for this insured to reduce their up front premium. The auditor for the new carrier discovered that the insured had not included health and welfare payments, otherwise known as “fringe benefits,” paid to their employees under the service contract act. The new auditor rightfully included those items as rating exposure while the previous auditor, for many, many years, had allowed them to be excluded. The result was a $300,000 additional premium! We were able to help reduce their premium by well over half, not because of the fringe benefit issue, but rather we discovered another problem in that incorrect class codes were being used on their policy.
Those are just a few common problems that may crop up when changing insurance carriers. Of course, there are more….
Hope this helps you out and thanks for reading!