Self Insureds And The Workers Comp System - Misconceptions Part VI

We are in a risk pool with other insureds, but that still makes us self insured.   

This is one of the scary assumptions that exists in the Workers Comp market today.  Please note that I am not talking about the Assigned Risk Pool.   We receive many calls and emails from employers that have been assessed huge premium bills from a risk pool that they were in, be it a privately founded or a government-based Workers Comp risk pool. 

These are not as popular as they once were in the 1990's, but risk pools are starting to make a comeback of sorts.  This usually happens in a hard market situation.   Who can blame companies for trying to stay afloat by searching for every insurance option that is available.?  

Homogeneous risk pools originate when a private insurer starts a risk pool (with the State Department of Insurance approval).   Companies that are similar in nature (i.e. trucking companies) are pooled together to share in the risk of Workers Compensation accidents.  Sometimes, state governments will create a risk pool to usually function as an insurer or last resort.   The risk pool will produce each member's E-mod and will assess each of members in the pool.  This sounds like a good arrangement. 

There are many unexpected problems or concerns with Workers Comp risk pools:

• There are not enough employers to satisfy the Law of Large numbers - the risk cannot be spread evenly.
• Some safer members may be subsidizing the unsafe members of the risk pool
• If the risk pool does not spread the risk evenly, there may be huge assessments for the risk pool to survive (KIMI in Kentucky is a great example).  Sometimes these assessments are made after the pool has failed.
• There is no control of how the claims are handled.
• If the risk pool fails, the employer may be directly responsible for the future handling of the Workers Comp claims.  
• If the risk pool incorrectly reports your claims to the State Rating Bureau or NCCI, your E-Mod may be inaccurate for many years.
• The Departments of Insurance may not have as much authority over your policy or claims. If you have a complaint or concern, they may not be able to assist you.     

The final thing I wanted to cover is that you are not self insured when you are in a risk pool.  Your company's Workers Comp program is much more like an alternative type of program.   Risk pools are a great way to insure your Workers Comp risks, but please check them out very closely before joining as a member.  

Self Insureds And The Workers Comp System - Misconceptions Part V

Self insurance may not save $$$ when compared to a regular Workers Comp policy.

Most of the time, I would agree that self insurance will save money for any employer that can qualify for self insurance. However, there are times when self insurance might cause an employer to actually pay more $ than a regular insurance policy.

A very low E-Mod/X-Mod may cause an employer to pay less premiums than self insurance payouts and expenses. If a company has an E-Mod of .8 or less, there may be no reason to convert to a self insured. This situation would have to be examined very closely. With the additional TPA expenses for a self insured, it may be beneficial to stay as a self insured.

A very bad market for reinsurance will cause a big increase in a self insurance program. This is one of the expenses that can rise very quickly. The reinsurance was provided as part of the premiums in a regular Workers Comp policy.

Your Loss Development Factor (LDF) forecasting a very high claims payout over the next ten years may indicate that self insurance is not the correct route for your company.

If your company is in an alternative insurance program such as a large deductible, carve out, or PEO - the numbers that are used to compare between these programs, self insurance, and a regular Workers Comp policy may be skewed. Trying to compare numbers in different alternative insurance programs may be risky as the numbers may have to be altered for comparison (apples to apples instead of oranges).

If your company is a large company with many locations, it may be wise to self insure in some states, and use regular Workers Comp policies in other states. When certain large companies are split up state-by-state, the companies may not be large enough to absorb many large claims.

I have added to this list a few times as there are many reasons to not self insure or at least look at the numbers more closely before self insuring. Self insurance can be a great alternative if the correct analysis is performed before becoming self insured.

Self Insureds And The Workers Comp System - Misconceptions Part IV

My company will easily qualify for Self Insurance.

We often hear this remark or estimation as companies are looking to self insure. In a few cases, this may be true. Most of the time qualifying can be a daunting task.

There are usually four minimum requirements by a state's Insurance Commissioner to become self insured. Sometimes a state may require more than these four.

1. Minimum asset amount - for instance - $500,000 in liquid assets
2. Self Insurance Bond - in case the company defaults
3. A qualified/licensed TPA to handle the claims
4. Reinsurance at a certain amount

The insurance commission may require even more stringent rules than the previous four examples. There have been so many different self insured employers default on claims paying that I think the states will become even more difficult to self insure in for Workers Comp clams.

The most famous case that I have read about over the last two months is Mervyns going under quickly and not being able to pay their Workers Comp claims. The state of California has a guaranty association/fund that allows the claims to be paid by the fund.

The one from above that sometimes confuses employers is #1. The states want to make sure that there are enough hard assets to avoid a small company such as a temporary employer from defaulting.

Employers that have already qualified for Self Insurance and employers that are trying to qualify for self insurance for the first time both face heavier scrutiny that ever due to the economy that we are experiencing.

Self Insureds And The Workers Comp System - Misconceptions Part III

This is the third installment in my post about self insureds. I had not posted enough about self insureds in the past.

One of the largest errors that self insureds seem to make is to only focus on paid and not enough on the future of a claim. A regular insurance policy for Workers Compensation builds itself around Total Incurred, which is so important.

The Workers Compensation basic claim formula is Total Incurred = Paid + Outstanding Reserves. Self Insureds seem to use past paid figures to adjust their budgets. The TPA will also not be as concerned with reserving as with regular insureds. Paid is important, but the reserves are even more important.

We often calculate Loss Development Factors (LDF's) for self insureds. A basic LDF should forecast the claim payouts for 10 years. Trying to forecast that far in the future is very complicated. This is the reason the reserves or Total Incurred should be very accurate for each claim. Setting the reserves on a file is more of an art than statistics.

Being self insured involves budgeting a pool of money for losses, no matter how repetitive or severe. You are basically your own insurance carrier as the money is spent directly out of your company funds. Just as you cannot just turn over the reins to your TPA, your company cannot just assume that the TPA has set your claim reserves as accurately as possible.

The best tool is to ask questions on any file where the reserves look odd. This also includes under-reserved files, not just over-reserved files. Some adjusters will increase the reserves up to the very edge of their authority, even though more reserves should have been added to the file. This enables the adjuster to handle the file without having a laundry list of questions asked about the file by their supervisor.

The most risky part of not having the Total Incurred figured correctly on a file is if the file is a large file and requires reporting the claim to the reinsurance carrier. If the file has too low reserves and the reinsurer has not been notified, and then the file inflates dramatically overnight, the reinsurer may refuse to pay for the file as the TPA and your company did not inform them in a timely manner.

If your company has to put up a bond in case of default, the bond may increase dramatically if unfunded claims show up on the books and the LDF jumps quickly.

This may put the TPA in a Catch-22 situation as if the files are over-reserved, too much money may be allocated to pay claims and the LDF may be too high. If the TPA under-reserves the file, the LDF may be too low which can cause the claims budget to have to borrow from other budgets to stay afloat.

How do you review the reserves and know the claims have the proper Total Incurred? The first step is to ask questions, but only ask questions on the right files, not all of them.

Self Insureds And The Workers Comp System - Misconceptions Part II

I will cover the first bullet from my last post.

We often hear at conferences and from clients that a self insured employer is out of the Workers Comp system. Nothing could be further from the truth.

Being self insured actually only makes the method that you pay your Workers Comp premiums change for the most part. Instead of paying insurance company premiums, you are actually paying the premiums directly out of your budget as a direct cost item. Paying premiums actually takes the chance of a string of claims wrecking your insurance budget. Your company will actually have to monitor the TPA that you use more closely than an insurance company. As I just mentioned, your TPA is paying directly out of your budget.

Just because you are self insured does not mean you have eliminated your company from having an E-Mod or X-Mod.. Your company will now have the same thing, it is just called a Loss Development Factor, or LDF. We have calculated many of them for self insureds. LDF's can forecast your Workers Comp expenditures for up to 10 years. LDF's can affect your:

• Choice of TPA's
• Letters of credit
• Financial standing with your lender
• Ability to stay self insured
• Self insurance bond
• Reinsurance
• Required budget allocated to Workers Comp expenses

Do these look familiar? These are the same things that are affected by an E-Mod/X-Mod.

An outside party has to handle your claims the same as a regular insured. Your TPA will usually be the same insurance company that uses the same adjusters to handle premium-based insureds. Your claims have to be handled in the same method regardless of your insurance status.

There are many other similarities between a self insured and a first-dollar insured. I have just covered a few, as the post would be very long if I covered them all.

Self Insureds And The Workers Comp System - Misconceptions

I have heard from many self insureds that I do not post often enough about the trials and tribulations of handling a Workers Comp Self Insured Program. They are/were correct. I am going to post a few blogs on self insurance over the next few days.

I will begin with the misconceptions that some self insureds or anyone else may have about being self insured for Workers Comp:

• Self insurance takes us out of the Workers Comp system.
• We only have to worry about what is paid, not the Total Incurred (Paid + Reserves).
• My company will easily qualify for Self Insurance.
• Self insurance will always save us $$$ when compared to a regular Workers Comp policy.
• We are in a risk pool with other insureds, but that still makes us self insured.
• We receive the same claims service from our TPA as an insured with a regular insurance policy.
• Captives are self insurance.
• PEO's are self insurance.
• We are in a large deductible program with a high retention level. That makes us the same as a self insured.
• If our company falters, a state-sponsored fund will pick up all of our claims and pay them.
• Self Insureds have more control over their Workers Comp claims.

I may add more as I think of them. I will post on one or maybe two of these over the next few days. If you can think of any questions about self insurance, please email them to me and I will answer them.

Red Flags That You May be Overpaying On Your Workers Comp Due To Payroll Audit.

The following is a short list of what we have seen in client files nationwide when we perform audits for employers.

After the Audit

• Has your company experienced significant increases in Workers’ Compensation premiums (big audit bill)?
• Has your company incurred charges for uninsured subcontractors or owner-operators?
• Has your insurance company included in your payroll any owner-operator expenses?
• Do your Classification Codes include “all employees” or “not otherwise classified” (NOC)?

Were your Insurance Company’s Workers’ Compensation Audits Conducted:

• More than 120 days after the Policy Expiration Date?
• Via telephone?
• Using 941’s or state unemployment forms?

Did the Workers’ Compensation Auditor:

• Not leave a copy of their Worksheets?
• Ask very few questions?
• Examine very few records?
• Seem to be brief and superficial?

It is a great idea to set aside time to review your Workers Comp premium/payroll audits and bills upon receipt. Ask questions if there is anything that looks out of place or seems to not quite fit with your Workers Comp policy. As the employer and insured, you have the most leverage before you pay the audit billing. Do not ignore the audit bill, as there are specific time limits to raising a dispute or paying the bill without penalty or cancellation.

Next Up - Self Insureds

The Time To Be The Most Concerned About Your Workers Comp Premiums

In my last post, I pointed out that if your company has a policy renewing on 1/1/09, it is too late to worry about your E-Mod/X-Mod. Other than providing proper payroll forecasts for the 2009 policy year, there should be more of a concern for the upcoming 2008 policy year payroll audit.

Regardless of what is in your original policy for 2008, the payroll audit is the judge and jury on this policy. The payroll audit usually occurs approximately 30 days after the 2008 policy year ends. The original 2008 policy can be altered in many ways resulting in a much more expensive policy than anticipated. We receive many calls and emails just after a payroll audit and billing was just completed.

If you receive an audit bill, you have the right to an explanation of all increases in your original premiums. Do not refuse to pay the audit billing unless there is a legitimate dispute with the payroll audit. Many states give the insurance carriers the right to immediately cancel the current Workers Comp policy if a employer does not pay an undisputed audit billing. We sometimes see where our clients have disputed an audit only to find out their payroll had increased sharply, which will result in a large premium audit bill.

I will cover the Red Flags From A Payroll Audit next time.

More on Recession-proofing Your Workers Comp Policies

I have received quite a few emailed comments and questions about the current recession. Quite a few forward-thinking employers have asked about the quickest method or methods to reduce Workers Comp premiums in 2009.

The first thing to remember is that Workers Compensation is a delayed-effect type of expenditure. Trying to reduce the Workers Comp premiums for 2010 should now be a company's goal. The 2009 policy is already in place unless your renewal date is after 7/1/09. The Workers Comp reserves that are set on files are set in stone six months before the policy renewal. If you are renewing on 1/1/09, all of the variables for your Experience Modification Factor (E-Mod or XMod) were in place on 7/1/08. Please look at my recent posts on how your time is being wasted by end-of-year claim reviews.

One question we are asked concerns going back in the past and arguing with the insurance carriers over past high reserve levels on certain files. We and any other consultant cannot audit old reserve figures. Reserve levels apply to the present only. That is why it is so important to monitor the reserves set by the adjuster on each Workers Comp file. A question to your Workers Comp carrier on a reserve level from 2007 will do no good.

Quite a few of our clients have us monitor all reserve changes on their files. Why? Changes to the Workers Comp reserves have to be questioned or corrected very quickly. The longer an excessive reserves figure exists on a file, the more difficult it is to have it changed. The one thing to remember is NOT QUESTIONING the reserves on every file. You have to pick your battles on the right files.

We will revisit the ways to cut premiums next time.

The Expected Has Come To Pass With The Hardening of Insurance Markets

The old soft market is no longer with us. I was very surprised that it took this long for the market to harden. This includes Workers Comp insurance and all other insurance coverages.

In the last two years, the insurance markets have seen:

• An increase in catastrophe losses
• Collapse of liquidity
• Disappearance of excess capital
• Quite a few major insurers are in trouble due to catastrophic investment losses - AIG being the most notable.

All of the "dark clouds" have resulted in the demand for highly rated, secure insurers being greater than the supply.

The insurance companies need to raise rates to refill their bank accounts. With the economy in place, insurance carriers have not and cannot institute any type of alternative types of insurance or coverages. Risk financing is not a viable option, as the capital markets have dried up for the most part.

What may be the start of the perfect storm for insurance carriers and employers? Many companies will seek to offset the effect of higher insurance rates by taking larger retentions, either by self-insuring or placing more risks in a captive. Any move to increase retentions will be one of desperation rather than careful analysis.

Unfortunately, some of these companies increasing their retentions will find themselves incurring greater losses that they cannot afford. Of course, with a professional risk management program in place to minimize and prevent losses, companies might escape unharmed.

The next part of the perfect storm is that increasing retentions is a great way to release internal capital. The other side of the coin is that these same companies will cut their risk management staff to the bone. In my opinion, risk managers are needed now more than when the insurance markets soften. When there is so much money at risk, who better to watch over the risks than a qualified risk manager?

The final part of the perfect storm is when the employers turn all of their risk management programs over to a broker. This may work in some situations, but as I have said often, the employer and their staff understand their business much more precisely than any outside party.

Many employers that have experienced skyrocketing Workers Compensation costs and wish to find an alternative way to cover all of their insurance risks after letting their broker administer their risk management functions have recently contacted us.

I estimate the hard market will be in place very long-term, as there are so many parts of the "Perfect Storm" for risk management that are already in place.

The Ohio Workers Comp Lawsuit Revisited

I had posted on this situation November 22nd. If a judge can grasp why the state cannot artificially structure the Workers Comp premium rates for Ohio business, why is the GOP having such a hard time figuring out this simple point?

Surprisingly, GOP lawmakers said they want to preserve a system used by the state to set job-injury insurance rates. This would override a Cuyahoga County judge who recently ordered the Ohio BWC to structure their premium rates similar to NCCI. In my last post on the BWC, a group of businesses had successfully argued that the bureau's group rating system made their premiums unfairly high. The steep discount received by the large business pools have to be made up somewhere and that is with increasing small business premiums.

Small businesses already take on more of a premium risk, as they cannot spread a loss over a large amount of payroll. Therefore, the system already discriminates against a business with a smaller amount of payroll. This is an acceptable premium slant towards large businesses. There is really no way to level the playing field in a NORMAL Workers Comp premium structure such as NCCI or most of the State Rating Boards. That is the nature of a normal Workers Comp system.

I do not understand why the Ohio Republican party would want to continue a system in which groups of businesses receive unfair, heavily-discounted rates. The large business premiums are subsidized by individual businesses. Republicans want to pass a bill in the final month of the legislative session while they still control both the House and Senate.

This gets back to what I have said many times before in this blog. Monopolistic state funds are being administered like a government agency, not as a Rating Bureau. There have been so many scandals with the Ohio BWC. I recommend that Ohio immediately change to having NCCI oversee their Workers Comp program. West Virginia and Nevada did it with great success.

Reserve Review Timing

As I posted last time, the reserve review timing has nothing to do with your policy renewal date. Do not waste your time with reserve reviews at your policy renewal, as your E-Mod has already been calculated with figures from six months before the end of the policy.

The way that most state insurance systems promulgate an E-Mod is to use the reserves that were on the files as of 6/30/2008 for your 1/1/2009 policy renewal date. I cannot say that I agree with the way this has been structured, but it is the system that is in place.

The best time to start looking at reserves is in 3/2009 for your 1/1/2010. The file reserves that are in place for your files on 06/30/09 will be the ones used for your policy renewal next year.

If your policy does not renew on 1/1, then just add six months onto the policy renewal date. This is better known as the Unistat date. All carriers that have had Workers Comp claims with your company are required to file your reserve amounts by this date.

Next up - How soon can you receive your E-mod before the next policy renewal date?

Is It Really Crunch Time For Your Workers Comp Policy?

I often hear that this is the crunch time for all agents, as there are so many policies renewing on January 1st of every year. That may be true - but is it crunch time for you as the employer? The answer is yes and no.

The "yes" is that if you wish to have your policies reviewed for premium overcharges, as every renewal will result in losing a year of policies that could have been reviewed. This is especially critical if your company has less payroll now than two or three years ago. J&L is able to go back three years in most states in our premium reviews.

The "no" is that if we are performing a reserve review, the end of a policy year has no bearing on how your Workers Compensation reserves affect your premiums. As I have posted very many times in this blog, doing a file review just before your policy ends is a royal waste of your time.

Why do reserves have no effect on your policies at the renewal date? Please check in next time.