A Disadvantage in CA Workers Comp Policies

California has changed their rating rules quite often over the last few years. After attending many of the WCIRB conferences, I noticed that the CA rules for rating Workers Comp policies is becoming very similar to the rating regs 0f the NCCI.

One area that is very unfair to CA policyholders is the limitation of the lookback period if a mistake is found in an employer's Workers Comp policy. If the employer is owed a refund, they can only ask for a refund from their insurance carrier for one year in the past and the present year. Most states allow for a lookback period of three years and the current year.

What does that mean to CA employers? If you find an error in your Workers Comp policy that results in a refund, you will only be entitled to approximately 50% of what is received by employers in other states. CA Insurance Commissioner Poizner will hopefully be able to modify this rule. If an employer has been overpaying for many years, why should there be a refund limit of only one year in the past and not three?

The Problems With A Short Rate Workers Comp Policy

The Short Rate Policy or Short Term Cancellation is when an employer and/or their agent makes the decision to cancel a policy before the renewal date.

There are many problems with Short Rate Policies including:

• The ominous Short Rate Penalty - This penalty can be significant, as the employer is making the insurance carrier receive less premium than canceling at the renewal date. The insurance carrier has to possibly take on more risk, as the carrier does not have as long as usual to recover their paid losses by charging a full policy term premium.
• Payroll Anomalies - We have been studying this phenomenon for the past few years and are still investigating the statistics. We have seen a disproportionate amount of payroll being loaded into, for example, a three month policy, and a new policy is then written. For some unknown reason, the Experience Modification Factor (E-Mod) can easily increase at a very rapid rate. The claims after the short-rate policy now have more claims vs. a lower amount of payroll. If both the claims increase and the payroll decreases sharply, the E-Mod can skyrocket.
• The employer's insurance history may be marred, as having more than one short rate policy in a few years time may indicate a "workers comp premium shopper". This could result in less carriers being willing to write workers compensation coverage for an employer.

If you think that there is something wrong with your insurance policy, do not just switch the workers comp policy. First, at least try to work things out with your carrier until the renewal date. You have many rights as the insured and one of them is to question how the policy has been written.

Assigned Risk Pool-Getting Out

The easiest method to remove your company from the Voluntary Risk Market and place your Workers Comp coverage in the general marketplace is to reduce your Experience Modification Factor. Your company may likely have a very high E-Mod compared to similar businesses. We have posted many previous articles on how to reduce your E-Mod.

Another way to possibly remove your company from the Assigned Risk Pool is to make sure that your agent has shopped your business in all available markets. We have seen this method remove companies from an Assigned Risk Pool if there are workers comp insurance companies that specialize in, or better understand, the risks involved with your company. Never just assume that you should be in the Risk Pool.

Make sure that your company has the correct Classification Codes assigned to it. Quite often, certain Workers Comp Classification Codes have a high risk associated with them and no insurance company will write the coverage in the voluntary market.

One mistake we have seen companies make is to think in the short term with cost reductions. Having a safer company will show up in your Workers Comp insurance in the second year of safe operations and will not be fully realized until the fifth year. We have seen companies switch their focus away from Workers Comp savings strategies, as there seemed to be no effect on their premiums.

There are a few companies that cannot be written in the voluntary marketplace due to the risky nature of the job functions.

Next Up - The Dangers of a Short-Rate Policy

Definitions: Assigned Risk Plan

Assigned Risk Plan: Sometimes called the Pool, this is a mechanism established by individual states to make sure that employers can obtain WC insurance even if insurance companies are not willing to write such insurance on a voluntary basis. Assigned Risk plans in many states carry higher rates than the voluntary market.

If your company is in the Assigned Risk Plan, you must do everything that is possible to get out of it ASAP. Why? For instance. in a certain state, the Advisory Loss Cost for an Administrative Assistant Classification Code (8810) was 41 cents per $100. The same 8810 Classification Code in the Risk Pool was $1.41 per 100.

That is almost a 400% increase. How does a company remove themselves from the Risk Pool?

We will talk about that next time.

Classification Codes-A Great Blog Reader Question

In one of your earlier blogs, you talk about Workers Compensation Classification Codes and how they describe the jobs that are performed in a business. Why do my Classification Codes seem to be different from what my business actually does, and why are they not the same as what our employees do on their jobs? I am confused.

This is one of the questions that is becoming more popular as the National Council on Compensation Insurance (NCCI) revises and eliminates their Classification Codes. This results in more of what is called classification by analogy. We have seen more of this type of classification in the last three years.

Classification By Analogy is the interpretation of what Workers Comp Classification Codes are the closest to the job functions in a company. The insurance company looks at each classification code as a level of risk. These are "guestimations" as there is no exact classification code that matches a job function or employee's job description. The most important word is interpretation. No one knows your business as well as you do.

If your Workers Comp Classification Codes do not seem to represent the job functions in your company, then have your agent and carrier review your classification codes with you and explain how they best represent your business. If you still feel that something is wrong, consult an expert in Workers Comp.

How To Handle A Huge Audit Bill Continued

3. If you are sure that you owe the whole bill, but cannot pay it, do not just ignore it and hope that it will go away. On the bill, there will usually be a phone number, address, and sometimes email address of the billing department. Call or email them ASAP and let them know that you will pay part of the bill. Making a good faith payment is a great way to keep your current insurance coverages. Send a check as soon as you can with the bill. It may be a good idea to call the billing department when the check is mailed.

Unfortunately, some carriers now are not accepting a partial payment, or at least they say they do not. I have never seen an insurance carrier to date send a partial payment check back to the employer. NOT EVER.

One of our mottoes is STOP JUST WRITING checks. Make sure that you owe the Workers Compensation premium bill and be sure to question how the bill was calculated.

4. Make sure the payroll figures for the next year's policy are adjusted to the audited payroll amounts, or you will end up owing a huge bill again at the end of the year. Unless your company has had a decrease in payroll, you will likely owe another big bill. It is best to pay it through the year on a payment plan versus having to pay an unbudgeted bill at the end of the policy year.

We have often seen the situation lately where an insurance carrier will write a policy in complete contradiction to the audits. Check to make sure what was on the original policy resembles what is on the Workers Comp payroll audit.

Have your reserves examined by an expert before your next UNISTAT date. A huge increase in Workers Comp reserves will make your next years' policy increase sharply, as your Experience Mod (E-Mod) will increase exponentially.

Next Up - Classification Codes Revisited

Readers Question On What To Do With A Huge Audit Bill

We received a huge bill from our Workers Compensation Yearly Payroll Audit. We cannot afford to pay it. What do we do? We do not want to lose our Workers Comp coverage.

I would advise you to do four things:

1. Do not panic, as you need to make sure you are taking care of the rest of the business.
2. Check to make sure that you really do owe that amount; if not, then dispute the amount you think that you do not owe. Do not dispute the bill as a way of delaying your payment.
3. If you owe the whole bill, then immediately call the contact person on the bill and tell them of your situation. Almost all carriers will let you pay the audit bill over time.
4. Make sure the payroll figures for the next year's policy are adjusted to the audited payroll amounts, or you will end up owing a huge bill again at the end of the year. Have your reserves examined by an expert before your next UNISTAT date.

I will cover each of the four points - two on this post and then two on the next post.

1. As you are very busy running your company or the financial end of the corporation that you work for, worrying about the bill will not help. We have never seen an employer lose their coverage when they are making attempts to pay the bill.

Often you will see a phrase such as , "please pay immediately", or "you have 10 days to pay." Most state insurance rules will let you have a longer period, even if your Workers Compensation insurance policy says 10 days. However, if you do owe the bill, then at least make contact with the insurance carrier. DO NOT IGNORE THE BILL as this will only cause more problems later on with your insurance carrier.

2. If you are not sure that you owe the bill, then you do have a right to dispute the audit. You must have some basis besides - The bill looks high, or There is no way we can owe this much. If you know something is wrong and you need help, call in an expert to look over the bill. We do not mean your insurance agent. We do provide this service. It takes time to get the records together, so getting help with your audit quickly is crucial. As mentioned before, do not use the dispute process as a way to delay paying the bill.

I have blogged How to Dispute a Bill very often. Please check my prior blogs on how to dispute a premium billing, or contact us.

Quite a few states now require the insurance carrier to inform the employer of how to dispute the bill. California is one of the states that is very specific on this point.

Next Up - #3 and #4.

Readers Question on Workers Comp Payroll Audits

I just received notice that the insurance company auditor is coming in to audit my company's Workers Comp information. How do I prepare for the audit? What information do I have to provide them?

According to your insurance policy, the insurance company auditor has the right to examine almost any of the records that your company has available. If you refuse to show the insurance company auditor the information they need, that may look suspicious to the auditor.

There are a few things that one can do to get ready for the Workers Comp audit. The best thing to do is make sure that you have ACCURATE and highly organized payroll records together with a summary sheet of those payroll records. Make sure that all subcontractors and temporary workers are segregated on the payroll. Have someone that is the most familiar with the payroll records be available to answer any questions and provide any additional information that the auditor may request.

It is best to make sure that the auditor has a quiet place to work, away from the daily activities in your business day. There are many guides on how to try to influence the audit, but we do not agree with them as being upfront and honest are the two best ways to conduct yourself when the yearly Workers Comp audit occurs.

We have seen quite a few employers become part of a disturbing trend when it comes to the audits. We will discuss this on the next post- Delaying the Audit.

A Readers Question on What Not To Do

I received my Workers' Comp payroll audit results. The auditor says that I owe $67,587 more than I originally paid for my policy. We are a small company and that is going to kill our budget. Any ideas on what to do?

We have commented on this question very often. Please check out prior blogs on this subject. The main thing I wanted to mention today was what not to do, which can possibly cost you even more premium dollars.

Do not:

• Call up your agent or auditor and protest the bill without any backing to the protest. That may damage the relationships you have established.
• Ignore the audit results or the bill - you may lose your chance to protest the bill, if necessary, and your carrier may cancel your current Workers Comp coverage
• Panic, as you have time to look into the bill. Sometimes the bill will give you ten days, but in most states, you have up to 30 days.
• Write a protest letter without looking at the numbers.
• Write the insurance commissioner - worse thing to do initially
• Try correcting the bill on your own - you may cost yourself more $.
• Think you can only protest the one bill - you may be able to go back many years to protest old bills, depending on the state
• Think hiring a premium expert is too expensive
• Protest the bill without reading your initial policy
• Protest the bill without knowing your classification codes and what they mean
• Just give in and write a check if you feel something is wrong. The word WHY is a very strong word to use. Most of the contact we receive from employers is when they have a "gut feeling" something is wrong.

Up Next - We will review what to do when you receive a Workers Comp Audit Bill

Can California's WC Judicial System Go Paperless

One of the goals of many Workers Comp carriers and TPA's is to be totally paperless. When I started as an adjuster many years ago, the carrier that I was working for had been using microfiche and a very rudimentary system to handle Workers Comp claims. It was actually a true paperless system. However, the adjusters of today will print off what they need to review instead of reading it on a screen.

If all goes according to plan, by the end of this year the paperwork for disputed claims by injured workers will be missing an important ingredient — paper.

This month California began testing a controversial new paperless system for handling disputed workers’ compensation claims, and officials hope to completely switch over on Nov. 10. The shift, planned for four years, will affect tens of thousands of people, both inside and outside of the state Division of Workers’ Compensation and the state Workers’ Compensation Appeals Board.

Although program officials say the digital system will be faster and easier, critics contend it has significant problems that could make maneuvering through the already-complex workers’ comp system more cumbersome.

Launching the Electronic Adjudication Management System, or EAMS, will mean a fundamental shift for 1,160 state employees, 140,000 to 150,000 injured workers each year, about 7,000 workers’ comp attorneys plus their staffs, and numerous insurance companies and self-insured employers.

I hope this system works. I think there will be a huge amount of printing at the beginning of the process if it survives.

One Big Advantage Of A Free Market System

The following comment is from a recent meeting sponsored by the state of North Dakota on looking into switching from a monopolistic state fund. I did find it interesting that the comment inferred that the injured employees receive better medical treatment with private insurers.

Deputy West Virginia insurance commissioner Bill Kenny says private insurers have broader experience in workers` comp. He says they`re often willing to spend more on advanced medical treatment to help get an injured employee back to work more quickly.

Next Up - California's Workers Comp System is Going Paperless?

North Dakota May Miss A Prime Opportunity

As I have said in many previous posts, a monopolistic Workers Comp carrier is not the best choice for a Workers Comp system in any state. North Dakota seems to have agreed to keep their current government-run monopolistic carrier.

Officials from Nevada and West Virginia say that taking their state`s workers` compensation operations private has helped lower insurance rates and provide better service, but the officials say the moves were prompted by severe money problems. North Dakota`s Workers Compensation system is financially healthy. State legislators say there may not be much support for taking it private. Right now, businesses that must have workers` compensation coverage have to buy it from North Dakota`s Workforce Safety and Insurance agency.

While North Dakota's WSI may be solvent and healthy, that may be at the expense of businesses paying out more Workers Comp premiums than in an open market such as Nevada or West Virginia have begun in the last few years/months.

Another Way To Know You've Been Overcharged

The following is a prime example of a Monopolistic Workers Comp State Fund not providing the proper service to their insureds. If a carrier or fund of any type is mailing out or applying refunds, this means that the employers were charged too much premium when their original policy was written and then again at the year-end payroll audit.

The Department of Labor & Industries (L&I) began mailing dividend checks last week to 100,000 employers as the final step of a process to return excess funds from the state's workers' compensation system. Another 28,000 employers will receive credit toward their next workers' compensation premiums. The remaining 11,000 employers will have their dividends applied to premiums already owed or other debts.

Last year, employers and workers enjoyed a partial workers' comp rate holiday, according to L&I Director Judy Schurke. Employers and workers saved more than $300 million in workers' compensation premiums by not having to pay Medical Aid fund premiums during the second half of 2007.

To complete the rate holiday, employers who did not participate in L&I's Retrospective Rating Program are also entitled to a one-time dividend. Retro employers receive their proportionate share through their retrospective rating assessments.

The dividends will total $37 million, and dividends will average $266 per employer. How much an individual employer receives will be based on the Accident Fund premium he or she paid in the second half of 2007. Checks will be sent to 100,000 employers in amounts ranging from $10 to several thousand dollars. About half the checks will be between $10 and $100. Another 28,000 employers will have their next-quarter premiums credited.

About 11,000 employers who owe workers' comp premiums or may otherwise have a debt with L&I or other agencies may see their dividends applied to those debts rather than receive a check directly. An employer will be notified if a dividend is applied to debts

Monopolistic Funds and Their Problems

As I posted yesterday, there are quite a few state-created Workers Comp funds that are having many troubles.

The reason for these problems might be the softening of the Workers Comp market. I think there are many problems with state-created funds including:

1. Poor customer service: If you are backed by the government, why does a fund need to have customer service, as there are no investors to answer to whatsoever?
2. The state will prop up a failing fund, but a private company will go under.
3. The funds are usually very large with departments not communicating.
4. Some funds attract and hire employees that could not make it in the private world. The pay rate is usually lower than the market average, which means the talented claims people or other insurance personnel will leave for more $.
5. The funds receive favorable loan rates which lowers the motivation to turn a profit to pay back the loans.
6. The state-backed funds "take on all comers" as they are sometimes the insurer of last resort. This means underwriting expertise will be sacrificed to write risky policies.
7. The states do not keep any of the control over the funds once they have been started. I have seen this really harm funds as they have no one to answer for in their practices.
8. Their rates are usually higher than most carriers, which causes employers to go elsewhere to find Workers Comp coverages.
9. Internal fraud such as in CA, OH, and others.

There are many more, but I think you may be able to see a trend in these nine. Please note that there are great employees in many of these funds. I am mainly questioning the management of those funds internally and externally by the states.

My Designations and What They Mean

A Question I Receive Often -

One of the questions that I often receive at Workers Comp presentations is, "what are the initials at the end of my name, and what do they mean?" (AIC, MBA, ChFC, ARM)


AIC - Claim professionals handle a wide variety of claims, including property, auto, workers compensation, and bodily injury claims. Earning the AIC designation can improve your technical claim handling abilities as well as your communication and negotiation skills. You can take the standard multiline approach, which covers personal lines as well as commercial lines, property, and liability; or, you can choose among four specialty paths if one of them would better suit your career needs.

ChFC - The Chartered Financial Consultant® (ChFC) designation program focuses on the comprehensive financial planning process as an organized way to collect and analyze information on a client's total financial situation, to identify and establish specific financial goals, and to formulate, implement, and monitor a comprehensive plan to achieve those goals.The ChFC program provides financial planners and others in the financial services industry with in-depth knowledge of the skills needed to perform comprehensive financial planning for their clients.

ARM - The Associate in Risk Management (ARM) designation is the undisputed professional credential for persons involved in the risk management field. The ARM designation signifies that an individual working in this field has attained a comprehensive understanding of the risk management process, from analysis to implementation and monitoring, risk retention and transfer, and the latest in advanced risk financing techniques.

Oklahoma State Fund Loses Ground

As I am originally from Oklahoma, news from the state on Workers Comp is of high interest to me. In this case, CompSource Oklahoma, the state-created workers’ compensation insurer, has been losing ground in its net number of policies at a steady clip since 2006.

According to CompSource, there is no regret to the loss in market share. CompSource’s lost policies are an indication of the strength of the private insurance market at the moment. But the data also indicates that hard times for the market may be on the horizon, as private insurers increasingly become the victims of their own success.

According to CompSource Oklahoma, private insurers may increasingly find themselves between a rock and a hard place as they balance the need to keep written premiums low with continued increases in medical costs. Workers’ comp reforms in several states have shown success in reducing the number of claims filed, but the cost of the average claim has grown enough to significantly erode the benefits of lowered frequency.

According to the latest NCCI report, frequency of claims per 100 workers has declined from 1.7 to 1.1 between 1997 and 2006, but the annual increase in medical care costs per claim averages 8.5 percent over the last five years. Medical care costs are growing faster than the overall Consumer Price Index medical care costs, NCCI reports, accounting for 59 percent of total claim costs in 2007.

Demand for insurance coverage declines during times of economic recession, as employers try to cut costs. At the same time, studies show more workers are likely to file claims during times of economic hardship. Employers may also cut spending on safety-related budget items, contributing to a rise in claims.

The leading private insurer in Oklahoma, AIG, holds 15 percent of the market share. CompSource was the leader in market share in Oklahoma during 2007, at 37.8 percent. During the last hard market cycle, in 2005, CompSource’s market share peaked at 46.9 percent.

Overall, I think that Compsource may be in a state of denial. Losing market-share every month may be due to other factors. From what I have seen, quasi-monopolistic state funds have all had problems when they are state-created. Such prime examples are:

• California - State Compensation Insurance Fund (SCIF)
• West Virginia - Brickstreet
• Nevada - Employers Holdings Inc.
• North Dakota - Workforce and Safety (WSI)
• Ohio - Bureau of Workers Compensation (BWC)

Why do state-created monopolistic and quasi-monopolistic funds really have problems? Check in with us Monday.

Top 10 Questions #10

Who is the NCCI and how do they affect my Workers Comp insurance premiums?

The National Council on Compensation Insurance is based in Boca Raton, FL. They are the main rate-making Workers Comp organization in the US.

The NCCI does not actually directly set the Workers Comp rates for the Classification Codes. They will make recommendations for increases or decreases to rates that must be approved by each individual state. Most states do approve their advisory rates without question.

The main function of the NCCI is to calculate your Experience Modification factor, or E-Mod. The E-Mod individualizes the Workers Comp rates to your company. Usually, even if your company is in a non-NCCI rated state, your company will be rated by the NCCI if you have risks in multiple states.

The NCCI is sometimes criticized on how they operate, but it is the best system in place to rate your company and provide your E-Mod.

Top 10 Questions #9

9. I had a great year with Workers Comp accidents this last year. Why did my E-Mod go up? That does not make sense.

We receive most of our most upset emails and calls on this question, except for Question #1 that was previously posted.

Your E-Mod will never reflect the policy year that you just finished. The insurance system in just not built that way. Let's say that you finished your policy year on 1/1/08. Your Experience Mod will be figured from January 1, 2004 through December 31, 2006, which is three years of time.

If you had a great year with little or no accidents in 2007, there is still a very positive effect. The 2007 policy year will affect your 2009, 2010, and 2011 E-Mods. If you have a great year this year in 2008, there is an additive effect, and the 2007 and 2008 policy years will show up in your 2010 and 2011 E-Mods.

The Total Incurred (see my many previous posts) is calculated for the for the 2009 E-Mod on 7/1/08, which lags six months behind the policy years. This timing allows the Workers Comp insurance company to have enough time to set the proper reserves on the newest claims. Once again, I agree with you that this is odd, but that is the Workers Comp insurance structure that is now in place in most states.