There Is No Such Thing As A Small Claim - Part II - The Math

Please see my post from September 27th. This is part two of that post.

In the 9/27/08 post, I had pointed out that the first $5,000 of the Total Incurred of a Workers Comp claim can cost up to 500% more than the the reserves beyond $5,000.

The math goes something like this - it may be good to have your company's Experience Modification Worksheet from the NCCI or your state's Rating Bureau sheet with you to look at for comparison. I will refer to the NCCI sheet. In the next post I will cover where to find this info on a few of the State Rating Bureau sheets.

I am reviewing one of our clients E-Mod sheets from an NCCI state. The page I am looking at is the one at the very end of the last page with some variables (A) through (I) on it along with the E-Mod. There is a variable on the left side under (A). That number represents a sort of discount factor. In the one I am examining, the factor is .79.

In the calculations to set your E-Mod, the (A) variable is subtracted from 1.0. In this example 1- (A) = 1 -.79 = .21. This is the factor for any Total Incurred above $5,000. Let's look at how that affects your E-Mod:

• The first $5,000 or the Primary Loss is not discounted or it is equal to 1.o
• Any part of the loss after $5,000 would be charged to the E-Mod at .21 or 21% of the first $5,000

Looking at this a little further, this means that the first $5,000 of any loss will cost as much as the next $23,800.

What does this mean to you? There is no such thing as a small claim(c). See my next post on how to even the playing field in light of this revelation.

A Tribute To the Real Cool Dude - Paul Newman

Something Outside of Workers Comp -

I always try to stay on point when posting about Workers Compensation Savings, but I wanted to post a tribute to the Original Cool Dude from Hollywood - Paul Newman. There is so much being written about him since his passing.

The reason he was so cool was not his movie roles, but what he did for charities. Paul Newman and the Newman’s Own Foundation donated all profits and royalties after taxes for educational and charitable purposes. Paul Newman and the Newman’s Own Foundation have given over $250 million to thousands of charities worldwide since l982. The Newman's Own Foundation makes grants to charities within the United States and abroad.

The mark of a person is what they do for other people. Paul Newman was the platinum standard for what a famous person can do to benefit others. With all the greed we have seen on Wall Street over the last few weeks, it is refreshing to remember there are people doing good for others.

By the way, I also liked his role in Hud.

Up Next - There Is No Such Thing As A Small Claim - Part II - the math.

There Is No Such Thing As A Small Workers Comp Claim

There are two ways that Workers Comp reserves have an effect on your Experience Mod (E-Mod, Mod, X-Mod).

The first $5,000 of the Total Incurred on each claim (reserves + paid) is called the Primary Loss. This is a very expensive part of a Workers Comp claim. Due to the way the Workers Comp system has been structured, there is no such thing as a small claim.

The original thought was that employers with many small claims are more likely to have more large claims out of the many small claims. This was actually a great way to structure the E-Mod calculation. There is a penalty that was never really assessed properly which may be an unfair part of the E-Mod process.

For example, if an adjuster sets a reserve on a small claim at $10,000. The two parts of the loss would be:

• $5,000 Primary Loss
• $5,000 Excess Loss

Looking at the numbers, you might think that your company will pay the same amount of premium for the first $5,000 as for the next $5,000 of the claim.

Check out my next post to see how the Primary Loss (less than $5,000) can cost your company up to 500% more than the Excess part of the loss.

My Company Received an Payroll Audit Notice, What Do We Do Now?

This is one of the most popular questions that we receive about the Workers Compensation premium process. A workers comp payroll auditor contacting a company can make for a stressful situation. From what I have seen, the word audit tends to make someone feel they have done something wrong.

A payroll audit is just what it is - an audit of your company's payroll to make sure that your company has paid the correct premium. I think the word "correct" should be changed to "more." Unless there is a reduction in payroll, almost all audits we have seen either leave the premium "as is" or increase the premium owed.

There are a few things your company can do to make the audit process easier:

• Have concise and complete records available. The auditor may ask for "everything." Request a list of what is needed for the auditor. Provide no more or no less than the requested amount of records. Spreadsheets are an invaluable aid.
• An audit is a contentious situation. Try to be as congenial as possible.
• Do not be intimidated. This seems to be a pattern of when we are called in at the end of a workers comp audit. We have seen the auditors try to intimidate the employers more now than in the past.
• While the audit has to fit in the auditor's schedule, the audit also has to fit into your company's schedule. As indicated in the last post, do not refuse the insurance company's auditor access to the records. As with any type of audit (tax, insurance, etc) the refusal may send a red flag that there is something amiss.
• Ask the auditor at the end of the audit to provide all workpapers that had to do with the audit. You have a right to have a copy of them, as they are the basis of your audit.
• Make sure that the auditor knows who is a sub-contractor, temp, volunteer or any other type of worker besides the normal positions.

The first time that someone has to go through a workers comp payroll audit can be a very tense situation. Good luck with the audit. If you feel uncomfortable, it may be good to call in an expert.

http://www.parma.com

What Happens If I Refuse to Allow the Workers Compensation Insurance Company Access to Audit My Financial Records?

This was a question from one of our blog readers. We have seen this situation a few times when we audit workers comp reserves or premiums for employers.

It is never a good idea to refuse access to your records by the workers comp auditor. The auditor will report your company as being non-compliant back to the insurance company. Every state has its own rules on how an employer can be charged premiums for non-compliance with a workers comp auditor's request.

The insurance carrier will usually charge 300% of the estimated premium. The workers comp carrier will also issue an immediate cancellation notice if they are the carrier of record. The auditor will also be very inquisitive to why they were not allowed access. This will also harm the relationship you have with your agent.

There are many ways to dispute an audit if you disagree with the results. It is not a very good idea to dispute the audit before it even occurs. You have the right to have the audit at a time that is convenient for you and your company.

What Is The Difference Between an IRS Audit and a Workers Comp Audit

I was actually asked a very similar question at one of my last presentations. I had originally thought there were no similarities between the two. Once I thought it over, I came up with the following similarities instead of differences:

1. You are usually going to pay $. The goal of both is to find additional premiums/taxes to be charged to your company and collected. Very few audits of either type result in no change or even a refund.
2. There is an air of intimidation. This is the #1 complaint I receive about insurance company auditors. However, if the employee is not a subcontractor, this rarely happens.
3. You know more about what your company does than does either one of the two types of auditors. Taking a stand is sometimes a good idea if you are sure that you are right.
4. They have the right to look through ALL the records, not just financials.
5. You need to prepare heavily for both. Do you take the same amount of time and effort to prepare for a Workers Comp auditor as for an IRS audit?
6. Both types of auditors are under time pressure situations. Almost all insurance company auditors have to complete a certain number of audits per week. Haste can make waste in these situations.
7. You cannot ignore the audit notices from an insurance carrier or the IRS. They both have the right to just estimate the tax/premiums and then collect that estimated amount. The estimated amount is going to be much higher than what you would have paid under an audit.
8. You can appeal either type of audit if it results in something that does not seem fair. However, you cannot just appeal to delay payment. We are sometimes asked to help a company come up with an appeals letter to delay paying premium. That is a bad idea. Both the IRS and insurance companies are usually good to deal with if you cannot pay the whole sum at once.
9. Having concise records to give to the auditor can only help your audit. Do not just hand over the company books. Have it all on spreadsheets, etc. Helping each kind of auditor will only help your final result.
10. ALWAYS be congenial to the auditors. They are just doing their jobs, just as you are doing yours.
11. DO NOT GO AT EITHER TYPE OF AUDIT ALONE. To quote a great reference book* - It is not the answers to the questions the auditor asks that causes problems. It is the answers that you give that lead to an additional question. In other words, it is not knowing what to say; it is knowing what NOT to say. Just as you would hire an expert in a tax audit, make sure that someone represents you in a Workers Comp audit. Either way, there are large sums of $ on the line.

*Jeff Schnepper - How To Pay Zero Taxes

Federal Reserve an Unintentional Party to Insurance Bid Rigging

As we all know, the Federal Reserve bailed out a very large insurance company today. I checked with a friend of mine in the insurance company in question and was warned not to mention their name due to legalities.

How does the Fed participate in bid rigging? It is not as direct as the previous versions. It now exists again with the recent bailout.

The old bid rigging:

1. Before any bids were submitted, it was determined which insurance company would win the business.
2. They set a "target" for the winner to submit as its bid.
3. They obtained losing bids from other participating insurance companies.
4. By misleading customers into believing that the customers' interests came first, the conspirators fraudulently obtained millions of dollars in premiums for the insurance companies.

The new bid rigging:

1. The insurance carrier artificially "low-balls" insurance bids and becomes insolvent.
2. The carrier wins the bids and takes a loss, but obtains the business away from more prudent carriers - creating artificially low bids.
3. The carrier is then bailed out to keep them in a competitive position.
4. The low-balling can continue as the carrier can bid lower than the market requires as they have an inflow of money that was not produced internally.
5. The carrier can keep low-balling which is not fair to the other carriers.

By putting in a floor or subsidizing the insurance market, the Federal Government may be aiding the insurance carrier to underbid the market. While this is a hybrid situation, the Feds have supported this low-bidding strategy.

HOW DO I KNOW THIS? We have reviewed some of this carrier's policies and have noticed that their bids in some cases are lower than the rest of the market. In some cases, the bids for Workers Comp coverage did not match the claims experience and losses to a very high degree. Now, will the bids become even lower with the taxpayers backing the carrier?

AIG is BAILED OUT

My last post was already loaded to post when it was announced that the US Government will bail out AIG. I will post soon on how the Insurance and Workers Comp insurance markets could be affected. I need to look over some of the market financial data to see whether the US Government is essentially establishing a quota or a floor on the insurance market.

What Will Be The Effect of A Possible AIG Failure On My Workers Comp Policy

If you are covered for Workers Comp by AIG, there will still be coverages for your company even if they were to completely fail. Each state has a guaranty fund that will keep the claims payments in place. Those payments may be delayed until the fund can absorb the claims. This is true for any carrier that operates in a state. There is a great safety net in place.

If AIG is operating as a TPA (Third Party Administrator) with your Workers Comp claims as your company is self-insured or is part of a self-insured group, then things could get tricky. Pulling your TPA agreement and having someone look over it may be a great idea.

You could be stuck with hiring another TPA as once a TPA fails, you are on the hook to keep processing the claims. I have seen companies have to pay for TPA services two or three times in one year due to the TPA's failure. State insurance departments may give you some leeway, but you are the ultimate payer when your TPA fails.

PLEASE NOTE THAT TPA'S ARE NOT COVERED UNDER A STATE GUARANTY FUND IN ALMOST ALL CIRCUMSTANCES.

It is very unlikely that AIG will fail. There is going to be a buyer, even if it is the US Government or a foreign buyer such as China. It is still wise to have a contingency plan in place as these are difficult times for any financial sector companies, including Workers Comp and other insurers.

How Will The Economy Affect The Workers Comp Market

How Will The Economy Affect The Workers Comp Market? This is one of my most debated topics lately. The opinion that I have is not very popular. I do not believe that there are any internal dynamics to the market becoming soft or hard.

As I have said for many years, the stock market controls the insurance markets directly. When insurance carriers can make quick and good profits off the premium dollars, then the insurance carriers can become much more competitive on price. During the 1990's, the stock market was volatile and climbing. If a Workers Comp carrier can discount a premium 10% and then invest the money and make a 20% profit, they are going to look to bring in a large volume of premiums quickly. This results in a soft market.

With the recent plunge in the stock market, I would expect a hard market. Insurance carriers will be investing money in interest-bearing accounts that are safe investments. Who can blame them? If the carriers can only invest the premiums in low-earning accounts, there will be no price competitiveness. This will result in a hard market.

There are other influences on the insurance market. One of them is the insurance companies faltering and going into receivership. With the failure of many banks in the near future, insurance companies are sure to follow. The smaller number of insurance companies will lower the competitiveness and harden the market even more.

Bottom Line - It may be best to prepare for the very limited availability of insurance coverages. If insurance carriers are going to cherry pick, make sure that your company is one of the nice cherries. There are many suggestions in this blog to help you in a time of a tight insurance market.

Another Question on Premium Audit Bills

When we were named "One of the Top 25 Blogs on Workers Compensation" last week, our blog has increased in popularity dramatically. The #1 Question that we have received from our increased web traffic is one that we have answered before a few times, but it is worth repeating.

The Question - We have just received our Workers Compensation billing from one year-end premium audit. The premium bill was 25% more than our original Workers Comp premium. We are not sure if we can pay the bill. We do not understand the basis of how the premium auditor came up with the figures. What can we do?

The first thing to do is to not pay the premium audit bill until you understand what the billing was based on by the premium auditor. Make sure that the complete audit bill is provided to you, including the audit workpapers. Review the bill very closely to see if it makes sense.

If the bill does not make sense, call or write the premium auditor with your questions. Often, the insurance carrier will say that you only have 10 days to pay the billing. This may not necessarily be true. If the premium billing is disputed, you may have up to 30 days to pay the bill. Do not use the dispute as a way to delay paying the bill.

One of my prior posts covers the "RED FLAGS" of Workers Comp audits. It may be good to look over that post. One of the main red flags is if there is a major change from your original policy.

If you are unsure of whether or not the premium audit bill is accurate, call in an expert. The best thing to do is not to just write a check if you have questions about your bill.

Blog Reader Question - About Retro Policies

A Great Question From One of Our Blog Readers - My company has a 5-year Retro policy. For 3 years of our Workers Comp policy, the rates seemed reasonable. Now, our premiums have skyrocketed. How could this have happened when the premiums were very reasonable the first few years?

A Retro is a hybrid type of a Loss Sensitive policy. The main term to consider is LOSS SENSITIVE, which means if the reserves are increased by more than a small amount, the premiums will increase exponentially.

In the Retro policies we have reviewed, there seems to be a trend that the reserves on the open files increased sharply over a short amount of time later in the life of the Workers Comp files. The look-back period is so much longer in a five year retro when compared to a regular Workers Comp claim.

Retro policies have to be followed very closely as the reserves have much more of an effect on premiums. Unspent reserves can be very detrimental to your current and future Workers Comp policies. Online access to your claims is critical. Almost all carriers will allow access to the claims files on at least a limited basis. We recommend online claims access whether or not the policy is a retro. Reviewing the reserves on the loss runs even quarterly may not be often enough to keep the reserves in check.

We recommend an agreement in the policy where you are notified by email if there is an increase in any of your Workers Comp files over a certain amount such as $5,000. This will cut out any surprises at renewal. Trying to negotiate file reserves at the time of policy renewal is an exercise in futility.

Self-Insured File Reserve Reviews

We often hear from Self Insureds that the reserves on a file do not matter that much, as it is paid funds that matter. Reserves are actually as much as or more important than with non-Self Insureds.

The basic Workers Comp equation is Paid + Reserves = Total Incurred. As I mentioned in a recent post, it is very difficult to question what has been paid on a file. The reserves are the funds that are forecasted to be spent over the rest of the lifetime of a file. They are opinions.

As I have mentioned often in this blog, the adjuster, who is considered the Workers Comp expert on file, is spending self insured money directly out of your company's budget. Why are the reserves important? They are what is forecasted to be spent and your budget must accurately reflect these forecasts.

The reserves are usually based on a somewhat sound principle by the claims staff. The reserves will feed into your Loss Development factors or LDF's. LDF's are really what you should budget in company funds over the next 10 years to pay the Workers Comp claims. Reserves are a road map to the expenditures for your Workers Comp claims.

For instance, if you have a file that has $15,000 paid in medical, but there is a medical reserve of an extra $100,000 to be paid there is likely a huge medical bill that the adjuster is expecting to pay. When you are examining a loss run and looking just at the paid amounts, you may think the file is rather inexpensive...and then the adjuster pays a $95,000 bill. What looked like a smaller file now balloons into a much larger file overnight. ($15,000 vs. $110,000).

The reserves are an insight to how your Workers Comp budget is going to be spent. Look at the reserve figures and make sure to contact your claims adjuster(s) if you notice something odd about the reserves. How do you know if the reserves are odd or foretell of an important event on the file? That is very difficult to do in most cases. AS I SAID EARLIER, RESERVES ARE AN OPINION.

This Blog Was Just Honored By LexisNexis

We were just informed by LexisNexis Workers Compensation Law Center that we were named one of the Top 25 Blogs for Workers Compensation. J&L has worked tirelessly to conduct a blog that was informative to all parties in the Workers Comp arena.

According to LexisNexis:

"The Top 25 Blogs contain some of the best writing out there on workers' compensation and workplace issues in general. They contain a wealth of information for the workers' compensation community with timely news items, practical information, expert analysis, tips, frequent postings, and helpful links to other sites. These blogsites also show us how workplace issues interact with politics and culture. Moreover, they demonstrate how bloggers can impact the world of workers' compensation and workplace issues."

We will soon be adding a search box so that you may search the blog and website for any questions that you may have about Workers Comp. We will also enable our great readers to subscribe to the blog in the very near future.

Please do keep the Workers Comp questions coming in as without your intuitive questions, this blog would have not turned out as well as it has for Workers Comp info.

Doing A Bill File Review Can Be Costly

Our clients often ask us if a meeting with the Workers Comp claims adjuster on all files is a good idea. As I have posted recently in the past few blogs, it is a good idea to be very prepared before the file review. The adjusters reserves are being reviewed, but the other side of the coin is that often an adjuster will review all files before meeting with you. There may be files where a reserve increase is indicated, costing your company more $ than you may actually save with a file review.

Not all files need to be reviewed. In fact, reviewing certain files may cost more premiums than if no files are reviewed. As I said the last post, BE PREPARED. Covering the files that have high reserves is your mission, not covering the files where the reserves are low and need to be increased. Remember, your premiums are based on Total Incurred. Total Incurred on a file is the Paid + the Reserves (Total Incurred = Paid + Reserves). There is little you can do about the paid amounts on files, as the funds have been spent. The area to zero in on with a laser-like examination is the open reserves.

The key is to know which files to review and which ones to leave alone. The adjusters will eventually get around to adjusting the reserves on all of your files. However, you do not need to point them out to the claims staff. Timing your reserve review on your Unitstat cycle is also critical. Please see our other posts on the Unistat date.

How do you know which Workers Comp file review to examine? As I posted previously, it takes an adjuster about 5 -7 years to feel comfortable with setting reserves on files. Can your agent help you? Yes, if they have a claims background (which is HIGHLY unusual) or an experienced claims analyst on staff. That is also very rare.

Calling in a Workers Comp premium auditor and a claims expert may be a good idea. In a recent survey, the premium dollars saved (Return on Investment) is about $6 in premium savings to $1 in fees paid to a premium auditor or claims expert.

Next Up - Self Insureds and Workers Comp File Reserves

The One Thing Not To Do

Working in a Claims Dept for many years, I had seen one thing that would totally backfire on an employer that had questions on their Workers Comp reserves. If you have established a working relationship with your Workers Comp claims adjuster, the following may not apply.

The one thing to not do centers around not being prepared. Calling your Workers Comp claims adjuster without being prepared to discuss the reserving on the file will usually cost your company more in premiums. Please remember that the Workers Comp adjuster is very similar to calling your bank's loan officer. The issue of credibility is critical. Being prepared = credibility.

The easiest way to to get prepared is to look over the Workers Comp loss runs. Usually, the loss runs do not have a status. You can email your adjuster and ask for a status on every claim or obtain online access to your claims. You should be able to see what is happening with your claims online.

How do you know what Workers Comp reserves are correct? That is a very tough call. It takes most insurance adjusters 5 - 7 years to gain enough experience to set the reserves on files. Setting reserves is a tough business. If you do not feel comfortable having this discussion, please call a Workers Comp audit expert. As I said before, negotiating your Workers Comp reserves is like talking with your bank. It will directly affect your budget.

Finally, the one thing to not do is to just call up the adjuster and confront him/her that your reserves are too high. This person is responsible for the reserves on your Workers Comp files which feed into your E-Mod that directly affects your insurance budget. This tactic can sometimes backfire.

The Big Workers Comp Gamble

A question from one of our blog readers - I received my Workers Comp policy run. How do I review the loss runs? If I find something that I disagree with on the loss runs, what do I do to get the mistake corrected?

In going along with the blog title, this is an area where a few employers can actually do more harm than good. As I mentioned in a previous blog, there are a few things that cannot be accomplished in a claims review. Any monies spent and any reserves on old policies cannot be questioned, except for the reserves on the current policy + the 180 day window mentioned in one of my recent posts.

A Few Ways to COST your company premiums are:

• Calling up the claims adjuster or supervisor and just saying "My reserves are too high, fix them" will fall on deaf ears.
• Not all files need to be reviewed. In fact, reviewing certain files may COST more premiums than if the file was never reviewed.
• The location of the file review, depending on the insurance company
• The method of the file review
• Who attends the file review
• The preparation by the employer is very important. "Shooting from the hip" can be disastrous in a reserve review.

To keep these blogs from being too boring, I will cover some of the above bullets over the next week instead of going over all of them in this post.