The Woes of North Dakota's Workers Compensation Program

If you have been reading any of the recent Workers Comp publications, you may have seen some mention of North Dakota's very intense problem with their Workers Comp Department - Workforce Safety and Insurance, or WSI.

I have read at least 20 articles on the investigations of the North Dakota WSI. They have been, and will be, subjected to numerous audits over the next few months. People have been jailed, only to be reinstated into their position and then fired again.

We had reviewed a Claims Processing Audit RFP for the WSI that wanted all of their claims to be audited going back five years. This was a big task to do as the requirement was to be on-site in February in North Dakota. So many of our Worker comp claims reviews have been electronic since 2001, but the WSI did not have the data structures to enable an electronic review.

All this is a symptom of one main problem, and that has been what I have said since the 1990's about states that handle their Workers Comp insurance programs like North Dakota. What is the problem? Check out the next post.

PS I just wanted to say that any of the personnel we had dealt with from the State of North Dakota were friendly, thorough, and very professional.

Up Next - What is the problem?

The IRS Shocks Everyone On Captive Taxes

One of the most hotly debated and controversial topics since the bid rigging accusations has hit the Workers Compensation world. The Internal Revenue Service has performed a complete U-turn on attempting to tax captives upfront, or actually to not allow the upfront tax write-off.

As I said in my last blog from a few weeks ago on this situation, I felt that the IRS was going to completely tax captives on the funds that were set aside to pay claims and not allow the taxes to be written off on the reserves set aside to pay claims when the claims were paid. The IRS had always said that a taxable event happens when the money is set aside for any type of financial arrangement. However, now captives are an exception to the rule.

Ever since September 2007, the IRS had said they were going to have public hearings on them taxing captives. I was 99.9% sure they were going to tax captives upfront when the money is set aside for paying claims - or in reality - were not going to allow a tax write-off, which is one of the main benefits for a large employer to create a captive for their insurance, especially for Workers Comp. Captives may now spread very quickly as an alternative risk financing arrangement. That is, until the IRS takes another crack at trying to disallow the reserve write off for taxes.

Captives are not the answer for all insurance situations, but they are now much more appealing with the advantage of an upfront tax write-off for reserves.

Next Up - The Woes of North Dakota's Workers Compensation Program

Governor Sanford of South Carolina

I have posted quite a few times on the plight of Governor Sanford and his trials/tribulations in trying to fix a major problem with the Workers Comp system in South Carolina. Governor Sanford has recognized a major problem with Workers Comp and is trying to correct it by preventing the Workers Comp Commissioners from being able to just pull a number out of the air as an award for permanent partial disability.

In our Workers Comp file reviews for South Carolina employers, we often see very high reserves left on a file when a viewing is upcoming on a file. These reserves directly affect what employers end up paying for Workers Comp premiums. The adjusters are usually baffled with forecasting what the Commissioner may award an injured employee on a file. There can be a very large difference on the same file with the same type of injured employee.

What Governor Sanford is trying to do is take the subjectivity out of the settlement and make it as objective as possible.

We have seen articles that say Governor Sanford is stretching his bound of authority too far or is walking down paths that his predecessors have already attempted and failed. The Supreme Court of South Carolina has decided to take up the issue soon. This may be a way for South Carolina employers to save millions in premiums.

If you are a South Carolina employer or pay South Carolina Workers Compensation premiums, please support Governor Sanford in his quest to save you part of your Work Comp budget.

Next Up - The IRS Stuns the Workers Comp World

How Many Chances Are There For Errors In Your Workers Comp Policy

How many chances are there for errors in your Workers Comp policy, premiums, or reserves? I started to write this blog and remembered that it was discussed in a prior blog. Before you look back into the J&L blog, what would be the likelihood that an error has incurred in your Workers Comp premiums?

Check back further in the blogs to see the number. What do you think it is - 50 chances, 500, or 1000? If you cannot find the blog, let me know. It is worth the read.

The next blog will be on a person we have followed often in his effort to straighten up the Workers Compensation laws in his state - Governor Mark Sanford of South Carolina. We have blogged the South Carolina Workers Comp System woes for months.

Up Next - Governor Mark Sanford's Efforts

What Is The NCCI

The National Council on Compensation Insurance is based in Boca Raton, FL. They perform the Workers Compensation rating calculations for employers and insurance companies in over 20 states. Even the states that do not use them for their rating calculations base their Experience Modification Factors (E-Mods/X-Mods) on their math. There is really no other company that promulgates E-Mods.

Most of my interactions with NCCI have been very positive, as they do realize they are a service organization and seem to treat people as such. You may have noticed the large NCCI insignia on your rating sheets. If you have not seen those sheets and you have the fiduciary responsibility for your company, please obtain a copy of them ASAP, as they impact your Workers Comp insurance budget heavily.

One of the main tasks that NCCI has undertaken is to change their Classification Code system by what seems to be a consolidation of the number of Classification Codes that are in place. There are now over 600.

There are state minimums to have an Experience Rating. If your company has grown very quickly from a very small company, you may be in line to be Experience Rated. Also, if you have a large deductible program for your Workers Comp clams, the carrier is still going to report your claims to the NCCI or State Rating Bureau.

I will not go into the E-Mods or Classification Codes in this post. Please check out the prior and archived posts on those subjects.

Next Up - How many chances are there for a mistake to be made in a Work Comp policy?

Are Self-Insureds Really Out of the Workers Comp System

I often hear when talking about Workers Compensation that a company is self-insured and does not need to worry about the trials and tribulations of the Workers Comp system as it is today. Actually, even if you are self-insured, the Workers Comp system is still there, but the numbers have changed.

Loss Development Factors (LDF's) are a twist on the E-Mods that are promulgated for regular insureds. The span of time involved is much longer - 10 years vs. 3 years for an E-Mod. You have to budget for those payouts just as if you had regular insurance. J&L has calculated a number of LDF's over the years. There is software out there that will do LDF's, but there has to be some intuitive inputs to the programs. An LDF is not set in concrete.

The claims are handled by a Third Party Administrator (TPA). The files are handled the same whether an insured is self-insured or not. One of the areas that we sometimes have concerns over is that if there are self-insured and regular-insured files in an adjuster's claims load, the self-insured files sometimes seem to have less care. I am not saying that this happens all the time, but we have seen enough in our audits to call it a trend.

If you are self-insured up to a certain amount, say $250,000, the insurance carriers are still required to report your claims numbers to NCCI or the State Rating Board and your company will still receive an E-Mod.

You may look back in our archived posts on the post called the Self-Insured Phenomenon for another article on Self-Insureds.

Next Up - The National Council on Compensation Insurance (NCCI)(c) - who are they and what have they been up to lately?

Follow-up Question to the Last Post

We have received quite a few questions about the software that we have developed for analysis for Workers Compensation policies, premiums, E-Mods, and reserves. We are in the process of making the software available to businesses through our website on a per-use basis. Creating intuitive web-based software is a large task.

As of now, we use the software internally as an aid to performing Workers Comp analyses for our clients. What is the number one error we have found on Workers Compensation policies and reserves? Check the archived posts to see what we have uncovered in our analyses.

The first step to cut your Work Comp costs is asking "why?". If you or your company are just writing checks without questioning anything, you have a 50% chance of overpaying for your coverage. A good reference guide when dealing with Workers Comp is on our website at http://www.cutcompcosts.com/definitions.html. Print the definitions out or save them to your hard drive. They will come in handy.

Next Up - Are Self-Insureds Really Out of the Workers Comp System?

A Question From Our Blog Readers

Can you give me a quick history on J&L Risk Management Consultants?

Without sounding like an ad, I started J&L Insurance Consultants, Inc. in 1996. I was originally helping the spinning mills in North Carolina straighten up their Workers Comp claims filings and to help them with their E-Mods. Some of them were disastrous with E-Mods over 2.0. Due to NAFTA and GATT, the spinning mills closed very quickly.

I started noticing that the Workers Comp policies were written incorrectly and had many mistakes on them. I had a heavy statistical background and decided to address and try to correct mistakes in the premium calculations and the reserving of files. What I wanted to offer was an analysis that started at the premiums paid and worked back towards the reserves that caused the E-Mods to change.

As far as I know, we are the only company that offers this service that is not involved with making an agent's commission. Some companies are great at analyzing one piece of the process, but we are the only ones that have intuitive software for premium calculations and reserving.

Being a former Systems Engineer for a major computer company, I was able to construct software that would enable employers to analyze and cut their Workers Comp Costs. We have found it to be invaluable in helping employers cut their comp costs over time.

A Question From One Of Our Blog Readers

A Question From One of our Blog Readers - In one of your earlier blogs, you said that Workers Comp monthly or quarterly loss runs are like gold to an employer. What are the deadlines for reviewing them to try to reduce my premium?

Our recommendation is that you set aside some time after receiving each monthly/quarterly loss run to review the claims. One of the reasons that you must review them very often is one of my old work comp rules -

You cannot go back and change what has been paid on a Workers Comp file or change the reserve after the file has been closed. Workers Comp reserves are the "here and now" money that is going to affect your insurance budget for up to five years.

Workers Compensation premiums have a look-back period where we can go back into the past a few years, but we can do nothing with the reserves on a file that has already been handled and closed. There are some companies that will go back into the past and try to sue their Work Comp carrier, but that is usually a long, drawn out process where everyone loses.

There are some prior posts that cover how to look at your loss run in this blog. You must start talking to your insurance carrier three months after your new policy just renewed. That does sound strange, please read this carefully. Do not start trying to review your reserves in November for a January 1 renewal date. You are months late and will not help your E-Mod or premiums.

Feel free to email me at jmoore@cutcompcosts.com if you wish to know when you need to start reviewing your reserves and when your reserves will affect your E-Mod and premiums.

Up Next - Another question from our blog readers.

SC Gov. Sanford Tries To Reel In State's Costly Workers Comp System

South Carolina Governor Mark Sanford tries to reel in his state's very costly Workers Comp system.

There will be much debate about whether Governor Sanford can actually order a group of impartial (?) judges to use the American Medical Association (AMA) guidelines in deciding permanent disability ratings. There will also be questions about whether a Workers Comp judge can use synthetic future earnings on which to base part of the rating.

One thing is for sure. Workers Comp insurance rates for SC will see a reduction in a few years if Governor Sanford gets his way. Why?

Whenever we are doing file, premium, or reserve reviews for a SC client, we often have to email or call the adjuster that is on the file to answer a few questions or for a status. The reserving of a SC file is almost impossible with judges subjectively coming up with an impairment rating out of the blue.

What an employer pays premiums from is the total incurred figure set by adjusters on the respective employer's Workers Comp files. An adjuster has to increase the amount of total incurred and reserves more than a file in a state outside of SC. There is no way to GUESS what $ a judge is going to give a claimant at their viewing. I remember many years ago when I was trying to set reserves as an adjuster for South Carolina Work Comp claims. I usually put up quite a large amount of extra reserves for the viewings as they were so subjective.

A Workers Comp adjuster is going to usually go on the high side of their estimation. If there was some standard for permanent partial impairment ratings, everything would be much easier and save employers thousands. This is not to say that we should shortchange an injured employee, just have a standard.

There are certain quirks in all Workers Compensation laws in most states. This just happens to be one that is very costly to the South Carolina business community. This all will likely play out in the South Carolina Supreme Court and that will likely not be the end of it.

Next Up - Answering a Question We Received a Few Days Ago

How Long Does One Bad Year of Claims Affect Premiums

This is a question we receive very often.

The first thing to look at is the state laws and rules on how your E-Mod or X-Mod is calculated. That will have some bearing on the length of time. Most states caulculate the E-Mod/X-Mod over a three year span. However, the three year span does not "kick-in" immediately the next year. What happens, for example in 2008 will not affect your insurance company premiums until the 2010 policy. Why?

Workers Comp is calculated on a delayed system. The E-Mod for a claim in 2008 will hit the E-Mod on the 2010, 2011, and 2012 policy years. Yes, you pay THREE times for a bad claims year. That is the way the Workers Compensation system is structured for losses.

Do you pay 1/3, 1/3, and then 1/3 of the bad claims year of 2008? NO You will pay more like 60%, 60%, and 60%. But wait, that does not add up to 100%. You can now see how a bad claims year can be very expensive.

The NCCI or State Rating system that is in place amplifies the amount that the Work Comp carrier reserves on the claims. Is it a fair system? It is the one we have in place. The best way to stay out of the system is with a safety program, making sure that you are being charged the proper premiums, and making sure that the reserves on your files are accurate.

Next Up - SC Governor Sanford is now in Federal Court trying to keep Workers Comp under control in SC.

What Number Should A Safety Person Be Most Concerned With

I have asked this question often when presenting to Loss Prevention, Safety Engineers and similar positions. The answers that I often hear are:

• Number of accidents
• Lost workdays
• Self-inspection results

Those are all important. When a VP or President of a company asks me what number is the most important in evaluating a Work Comp safety program, I always say the Experience Modification Factor (E-Mod or X-Mod). Why? Because it is the distilled number of what the claims costs are for a certain company. In other words, it is the insurance carrier's notation of how the safety program is performing over a few years, not just one.

Oh, and self-insureds are not immune from the E-Mod. There is a different term for the E-Mod for self-insureds and it is the Loss Development Factor (LDF). The LDF may cover more years than the E-Mod, but it is still the ultimate evaluator of a company's safety program.

I often hear from safety personnel that the insurance is "some other department's problem." Nothing could be further from the truth.

Bottom Line - The LDF or E-Mod/X-Mod is the Workers Comp safety program's effectiveness turned into cash.

Next Up - How long does one bad year of claims cost a company's Workers' Comp program?