How Do Reserves, Total Incurred, and Paid Affect Your Premiums

When I am making a presentation or when I receive email questions about my posts, one of the areas that is often mentioned is the formula on the parts of a Workers Compensation claim.

There are a few modifications or rewordings by insurance carriers that change the variable names. The formula is : Paid + Outstanding Reserves = Total Incurred.

A quick definition for each of the three terms:

• Paid - what has been paid to date on a claim. This does not include anything pending. This number is almost impossible to change as what has been paid on a claim cannot really be altered unless there was a mistake in a payment.
• Outstanding Reserves - the projected payouts that have yet to be paid over the life of a Workers Comp claim. The adjuster uses a "rule of thumb" to set the reserves. The reserve figure is totally negotiable as there are no absolute formulas for estimating the future payments. This is an opinion of the adjuster.
• Total Incurred - The present and future total cost of a claim. This what feeds into the Experience Modification (E-Mod) formula and can heavily affect your premium. The claims figures on your NCCI(r) or State Bureau come from this figure.

I often hear that only the Paid figure affects the E-Mod. This is not true. The total incurred is the amount that is the starting point for the E-Mod calculation. The most important factor is that the Total Incurred is charged to your E-Mod at least three or more times.

I have posted many times on how to examine the claims reserves or total incurred. The easiest way to begin is to look at your loss runs. Knowing what to ask about each claim reserve is key. Online access to your claims is golden as you can track what is happening or if you hire an expert, it will save you a large amount of consultant $.

Have a great and safe Halloween.

How To Pay up to 400% More For Your Workers Compensation Insurance

I recently read a great article on the West Virginia Assigned Risk Pool in the Daily Mail. The article was very accurate on how the Assigned Risk Pool works and the increases in premium for being in the Assigned Risk Pool. The article said the rates were 25% higher than the normal Workers Comp Insurance market. The Assigned Risk Pool begins on 1/1/09. Removing Brickstreet as the insurer of last resort should help WV's largest workers compensation carrier.

In looking over the Assigned Risk rates for states such as Florida and North Carolina, it is obvious the Assigned Risk pool can be much more expensive than employers may realize. I had written a previous post where I compared the rates between the regular and assigned risk premiums. You may wish to use the search box to find the article. What I found previously was astounding to me.

I will revisit a good and quick example for North Carolina [7228 Long Haul Trucking]:

Rates are per $100 of payroll

• Assigned Risk Rate 19.97
• Regular Rate 11.08
• Difference 8.89
• % Difference 80%

I do realize that some insurers will increase the Regular Rate from the Advisory Loss Costs in the above example. Where else in a tax structure or business cost does it cost 80% more for basically the same supplied product? If your company is in the Assigned Risk pool, it is highly advisable to do everything to get the company out of the pool.

The first step is to find out why your company is in the pool. We have seen a few employers obtain a regular market insurance rate just by exploring the Workers Comp insurance market heavily at the time of the quote. If what you find out does not sound right to you, keep asking for an explanation.

Defense Firms Are Going to Pool their Workers Comp

Workers comp coverage for defense contractors working overseas may shift to a single insurer in the near future under a law recently signed by President Bush. The idea is based on risk pooling as a way to cut costs. I have always been a supporter of pooling risks as long as the pool was large enough to invoke the law of large numbers.

The 2009 Defense Authorization Act will completely pool all of the workers comp coverage for overseas defense contractors and place the coverage with one provider. The pooling of workers comp risks with one provider was initiated due to a very sharp increase in accidents and payouts in 2006 and 2007.

Overall, this may be a good strategy. However, there are two concerns that may make a single provider cost even more $:

• A single provider may not be able to handle the giant influx of claims. This would result in poor service and even a sharper increase in costs.
  
• The Department of Defense does not keep a loss history, which is beyond critical in providing data for a request for proposal.

There are other concerns that the insurance industry noted. We will have to wait about 7 years to see the results of this move due to the long term development of the workers compensation claims.

Is A 5% Increase Enough for California's Workers Comp System?

California Insurance Commissioner Steve Poizner approved a rather anemic 5% pure premium rate increase for Jan 1, 2009. The California Workers Compensation Insurance Rating Bureau (WCIRB) had recommended a 16% increase. Is this dangerous territory to cut the increase in pure premium rates by 11% from what was recommended?

The reason for the 16% increase was due to the medical loss development. The percentage does seem to track what has occurred with the increased rates of medical treatment and number of treatments.

The positive aspect of the 5% increase is that the rates will not increase dramatically for employers in what is a down economy. This will alleviate part of the budget crunch that companies now face. The 5% increase may reduce the volatility that would likely occur with a 16% rate increase.

The negative aspect of the smaller increase may be the 5% increase may not keep pace with the medical development. This could cause a "snowball effect", as the next increases may have to be even larger to catch up to the medical development in California.

I had always thought that the recommended decrease in rates was too extensive over the last few years. Those sharp decreases may be catching up with the California Workers Compensation system.

The Most Powerful Question To Ask To Save Premium $

The strongest question to ask to take control of your Workers Compensation program is "Why?". One of our old mottoes is "Stop Just Writing Checks" and ask questions. We have seen so many employers and governmental entities just write checks as if their Workers Comp was just a "cost of doing business." Nothing could be further from the truth. This also applies to self-insured employers paying a TPA for claims processing costs.

I have performed studies on thousands of files and have found that if an employer starts asking why their Workers Comp is costing so much, their premiums will decrease over time. I do realize that it is a tough task to pay quite a bit of attention to Workers Comp premiums when health insurance, fuel, and other costs are increasing at an alarming rate.

We never recommend turning over your insurance budget totally to an agent and just funding the WC insurance program. I have never met an agent that did not want their clients to ask questions about the insurance policy renewal or audit processes.

Any time that you receive a policy renewal statement, audit statement, or any policy endorsement, ask why, especially if you are asked to pay more premiums than expected. Keep asking why until you feel you have received an answer to your question.

It may sound too simple, but give it a try and you will be astonished at the results.

What Is The One Question That You Can Ask That Will Always Save Premium Dollars?

I have written on this question before this post.   I decided to post again on the easiest way  to cut workers comp costs.  It is the sure-fire way to save premium dollars.  Check back in tomorrow for the one question to ask.  Email me if you think you know the question.  It is easy to ask.  Most employers will not even bring it up.           

What Classification Codes Are Standard Exceptions?

A Question from one of our readers on Standard Exceptions. In your last post, you mentioned Standard Exceptions. What are they and why are they important?

We will use NCCI Standard Exception Codes - classifications that are common to many businesses and that are generally not allowed to be designated as the governing classification. The governing classification is the class code that produces the most payroll in a business. The Standard Exception Codes are:

• 8810 - Clerical
• 8742 - Salespersons or Collectors - Outside
• 8871 - Clerical Telecommuter Employees
• 7380 - Drivers, Chauffeurs, Messengers, and Their Helpers NOC—Commercial
• 8748 - Automobile Salespersons

These do not cover all states, but most of the non-NCCI states have almost the same codes. The key is the codes cover much more than just the above exact code descriptions. Most of the time, the Standard Exception Class Codes are much less expensive than the other class codes.

These codes are the ones that are most often disallowed by workers comp premium auditors. We see Code 8810 (or its equivalent) being changed the most during audits. Documenting the job duties of any employees with Standard Exception Codes is very important.

Can An Employee's Payroll Be Divided Amongst Different Workers Compensation Classification Codes?

A Question From One Of Our Readers On The Last Post - 

Are we able to split a job into different duties and keep track of each job duty on the payroll?  Would that save us Workers Comp premiums? 

Yes, you may split up an employee's job duties among different classification codes under the Interchange of Labor Rule.  This may save your company $ in Workers Comp premiums.  However, the rules are very specific and somewhat complicated.  There are a few caveats that come with splitting up an employee's payroll into different workers comp classification codes.  They are:

1. Every minute the employee worked under a certain classification code would have to be tracked.  An estimate or % is not acceptable. 
2. You cannot mix the payroll among the Standard Exception codes and another class code.  The main Standard Exception is code 8810 - Clerical. 
3. The employee cannot be considered a miscellaneous employee.  The term miscellaneous is not a true miscellaneous employee. 
4. The payroll for holiday, sick, vacation, and overtime will usually be assigned to the higher class code. 
5. The records for this must be very accurate and well-documented. 
6. Certain states may not allow the split of payroll. 
7. Certain classification codes may not allow the payroll to be split. 

Unfortunately, we have not seen the division of payroll to be an advantage to an employer.  The main reason is that the employee has part of their job duties as a Standard Exception, which results in the employee being rated in a higher classification code.  This applies even if the employee only works a few minutes in a different job.     

It is advisable to make sure that the division of an employee's payroll will actually reduce the Workers Comp premium before policy renewal or the payroll audit.       

  

An Inadvertent Way To Increase Your Workers Comp Premiums

I have seen a situation happen very often in a recession that can cost an employer a large amount of workers comp premium dollars, especially at the yearly payroll audit. This is very prevalent in California now.

In a recession, most companies start to cross-train or lay off employees. This causes employees to do job tasks that they might not usually do in a normal economy. If your company is in this situation, please be very careful not to assign an employee to a job duty that would cause a great increase in premium.

For example, if an administrative or clerical worker is given a very small job to help clean tools, that employee's workers comp classification code may change from a low risk job (clerical) to a higher risk job (mechanic) .

Even if the employee only cleans tools for one-half hour per week, the insurance carrier auditor will move the employee from the lower class code to the higher one, which can increase the premiums you pay for that employee up to 5,000%. We have seen this recently in quite a few of the audits in the down economy.

As I heard at an NCCI conference, if the employee performs the high risk job only for a few minutes a week, they should be classified in the higher class code without a doubt.

Bottom Line - make sure the workers compensation insurance carrier auditor knows exactly the job duties of all employees and back up your job classification with documented job duties. This may be time-consuming in the short-term. In the long-term, it will be well worth the documentation effort.

Recession Proof Your Workers Comp Policy

A Question From One of the Blog Readers - How do I recession proof my workers comp policy?

The easiest way involves the payroll that your company is reporting for your WC policy. If your company has experienced layoffs, reduction of hours, or any reduction of payroll, make sure the auditor at the end of the year payroll audit has the documentation to reduce your payroll.

If you are being quoted for a new policy, it is not advisable to use the payroll figures from the year before as a basis for the current year's payroll if you are planning a reduction in hours or personnel. If the payroll is overestimated, you are basically giving the insurance company an interest-free loan that will be recovered over a year later at the audit.

Check the next post to see a way to accidentally increase your premiums by 300% or more.

How Will The Current Economy Affect My Workers Compensation Premium?

We have received this question very often from employers over the last three weeks. We have covered this recently. We thought it was best to cover it again.

The Workers Comp market is not as bad as it may seem right now. Even AIG was not failing in its insurance divisions. AIG was failing in the investments area. The market for insurance coverage is doing OK right now. I am not sure if I would even call it a hard market. When looking at the hard to soft market fluctuations of the past, the insurance market usually has about a six month lag behind the investment markets. The worst hardening of the insurance market is probably yet to come.

What I have noticed is the insurance carriers have lately been performing questionable Workers Comp audits and then bullying the employers that try to dispute any part of the audit. The hotspot for the heavy-handed audits is California. As we all know, California seems to be at the forefront for how the insurance markets operate for the most part.

We recently performed a re-audit for two different employers in California. The employers were a casino and a construction company. Even though the employers were correct to dispute the audits, the insurance carriers turned them over to their collection attorney without even considering the initial disputes.

That is when we became involved to straighten out the audit situations. The final results were a refund of $38,000 and the other one is still pending.

Could it be the case that the carriers are so overloaded with employers that are not paying their Workers Comp audit bills, that picking out the ones that have a legitimate dispute are lost in the masses? This is possible, but then again doubtful.

One of our mottoes is "Stop Just Writing Checks.(r)" If you are unsure of any communication from your insurance carrier, do not just assume that it is 100% true and correct. Asking Why is a very potent way to reduce your Workers Comp costs.

North Dakota's Workers Comp Was Given a Thumbs Up?

Recently, I read an article that said North Dakota's WSI - their monopolistic WC agency - was audited by a group out of Maine that said only correct denials were issued on all of their Workers Comp claims.

-Please note- due to the legalities I have been informed that I cannot mention the audit company's name, but only that they are CPA's and certified management consultants. I searched on their website for the words: workers compensation, workers comp, work comp. There were no search results.

I looked through the website for an adjuster, risk manager, or anyone with a risk or claims background. I came up empty there.

I looked at services and found Audit Services. I read through the web page and could find nothing on insurance or workers compensation audits.

Maybe I am missing something....or maybe North Dakota's WSI missed something. I am confused as to how a claims denial audit was performed by a CPA firm. Then again, maybe their risk management and claims personnel are not listed on their website.

There Is No Such Thing As A Small Claim - Part IV

From the last post, the Workers Comp adjuster closed the claim out after 4 years and spending out $1,000. The file was originally reserved at $10,000. The file was over-reserved by $9,000..

Using the Variable A (Excess Loss Factor) from the 09/30/08 post of .20 , let's look at the real claim dollars with the loss.

• Recalculated Primary Loss Over-reserved = $20,000
• Recalculated Excess Loss Over-reserved = $5,000

What does all of this mean? With the way that the Experience Mod calculations are structured by the NCCI or State Rating Bureaus, small claims are costing your company much more than you may realize.

The Workers Comp Experience Rating systems are structured to make sure that one huge claim will not ruin your E-mod. The flip side is that a few small claims can wreck your E-Mod and your Workers Comp insurance program for years to come.

A claim that is under $5,000 is not a small claim. As you can see $4,000 of a Primary Loss is much more expensive than it looks.

The bottom line is to not just zero in on the big claims. All claims that are reserved as a Lost Time file should be tracked closely.

There Is No Such Thing As A Small Claim - Part III

Well, we have covered how a small claim is not really a small claim after all. The one thing that we often see in workers comp audits - both premium and reserves - is that the smaller claims are ignored and the large claims are targeted. That can be a dangerous way to examine claims.

Take the case of the $10,000 Workers Comp claim that is four years old. That may seem like a small claim, but please look at the previous two posts on Small Claims and you will see that the basic way that the claim is charged to premiums is:

1. The first $5,000 figures in the E-Mod at the full value - the primary part of the loss.
2. The next $5,000 figures in the E-Mod at a discounted value - the excess part of the loss. Using the previous post, it would figure into the premium at $2,000.
3. From #1 and #2 above, a $10,000 reserve set by the adjuster would contribute $7,000 to the E-Mod/premiums.

That is the norm for a $10,000 claim, but what if the claim closes out at $1,000 after four years? That means the employer has overpaid on the claim for three years, and that the file was over-reserved by $9,000.

It is not $9,000, but even more as it is $4,000 in Primary Losses and $5,000 in Excess Losses. The parts that figure into the E-Mod are:

• $1,000 in Primary Losses were paid
• $4,000 in Primary Losses were over-reserved
• $5,000 in Excess Losses were over-reserved

I think we can leave it there for this post. We will pick up in the same place in the next post. It may be good to print out the posts on this subject and look at them. You will be astounded. I guarantee it.