Retrospective rating of a workers compensation policy is not for the meek, faint hearted nor for an uninformed insurance agent, agency or their client the employer! Retros are a special loss sensitive rating method employed by insurance carriers where they strip out the claim payment responsibility portion of the policy and place that responsibility back onto the employer. These plans can have a significant financial impact on the employer. The insurance company calculates a cost to administer the plan for the employer less the actual payments made for claims. Problems? What could go wrong? Read on….
Loss sensitive rating plans, commonly known as retro or retrospective rating plans, can be appealing. Think about it. Lets say your company has multiple millions of dollars in payroll, a great loss history and a professionally operated safety program. Your premium, under a typical guaranteed cost workers compensation plan, typically runs in the millions of dollars. You all of a sudden realize that when you pay the insurance company premium they become the beneficiary of your great loss control and low loss history record. In other words, the insurance company is pocketing your cash by not having to pay claims! So someone in your company, insurance agency or brokerage comes up with the idea of taking that risk, the risk of paying claims, back in house. After all, think of all the premium dollars you can save! Hmmm…
Well, it’s true. For some employers having control over the claim payment process can translate into money in the bank. Claim payments to injured workers become a financially managed business expense. And for those very sophisticated employers it can be a great tool in managing their workers compensation costs. But….for many employers a retrospective rating plan becomes the nightmare that won’t go away!
Does it make sense that you would open your check book and allow another company (an insurance company) to write checks for large medical and indemnity expenses? That’s often what happens with a retrospective workers compensation plan. When an employer signs up for this type of plan they give the insurance company seemingly carte blanche. The insurance company determines the validity of a claim, manages the claim, makes claim payments and then bills the employer for the claim costs. Doesn’t that seem like the employer is placing a great deal of trust in the insurance carriers ability to properly manage the claim? Improper claim handling is where many of the problems with retro plans begin.
Improper claim handling will also effect and employers experience rating factor. When a claim that may not be valid is paid by the insurance company the dollars paid will be reported to the rating bureau (the organization that develops an employers experience rating factor, the EMR) and included in the employers experience rating factor. That single claim may have an effect on the employers EMR and a resulting effect on the premium an employer pays for up to four years. This residual effect is a direct result of improper claim handling by the insurance company.
And now for the truth about workers compensation claims and retro plans. Claims can drag on for many many years! When an insurance company is first presented with a claim they will establish a reserve for future payments. The key here is “future payments.” A workers compensation claim is, in our industry, known as a long tail claim. In other words, it may take years for an injured employee to fully regain their ability to return to the work place. During this time period many unknown, unpredictable things may happen with the claim situation. Reserves may be adjusted and settlement costs incurred. These issues typically happen sometime after the end of the retro plan. Just when the employer begins to think they’ve completed their obligation under the plan.
If your company has a workers compensation retrospective rating plan you need to make sure your claims are being handled in a proper manner. Be sure to contact a workers compensation consultant and ask to have your claim files reviewed for accuracy.
As a final thought, be cautious with workers compensation retrospective rating plans. When they are managed correctly they can be a financial help but when they are managed poorly they can be a financial drain.
Hope this helps you out and thanks for reading!