Your E-Mod Is Not The Only Important Number in Workers Compensation

I have posted very often about how your company's E-Mod/X-Mod can make or break your Workers Compensation insurance budget. One of the most popular questions we receive is "Our E-Mod is low and we have had no accidents. How can our premium have increased so much in such a short amount of time?"

One of the shortcomings of the present Experience Modification system is that in a bad year for your company's overall industry, even a good safe employer can suffer greatly. If companies that share your Classification Codes had a bad year with Workers Compensation claims, then your company will share in their loss as the Class Codes your company possesses will become more expensive even if your company has had a good year with Workers Comp incidents.

For instance, if your company is a trucking company that has instituted many safety measures and lowered your E-Mod this does not mean a decrease in premiums. The Class Code for Long Haul Trucking is 7228. If most of the long haul trucking companies in a certain state had many accidents, the NCCI or State Rating Bureau will increase the 7228 loss cost or advisory code. If the increase in 7228 was very sharp, then you may see a large increase in your company's premiums even though your E-Mod is reasonable.

E-Mods can individualize you company's safety efforts, but only to a certain point. The E-Mod/X-Mod system is a good system, but it does have its faults. Many employers are looking to PEO's, Self-Insurance, and Captives as alternatives to regular Workers Comp insurance policies. One of the main reasons is that the cost of your Workers Comp insurance program is not affected by outside influences as much with some of the alternative programs.

Captives are becoming very popular as they are the best way to have the premiums that employers pay being only based on the specific employer, not a group of similar employers. In other words, your safety efforts are rewarded more than some of the other programs.

Your Payroll Forecasts May Be Killing Your Workers Comp Budget

One of the main components of your Experience Modification Factor (E-Mod/X-Mod) is your company's payroll.  One of the disturbing trends that we are seeing is that the payrolls from the last year are used to forecast the payrolls for the next year.  In this recessive economy, quite a few companies are actually going to have LOWER payrolls than the year before or two years previously.  

I recommend looking at the Workers Comp payroll figures on your policy very closely.  If the payrolls for the upcoming year seem to be high, immediately point this out to your agent and insurance carrier.  Overstating payrolls is the same as giving the insurance carrier an interest-free loan on the excess payrolls.  The premium auditor will catch the overstatement of payroll at the end of the year. By then, your company could have earned interest on the overpaid premiums due to the payrolls.  

     

NOC - What Does That Mean?

Another great question from one of the blog readers - We received our Workers Comp policy for this year. We noticed that all of our positions - Classification Codes have an NOC on the end of them. What does NOC mean?

NOC stands for Not Otherwise Classified. If you see this on a Workers Comp policy or premium audit, it means that the Classification Code is non-specific. There are usually more specific Class Codes, however, the underwriter or premium auditor could not place your business in any other Classification Codes other than the more general ones.

For instance, Store Employees, NOC means that the classification of your employees could not be associated with a more specific code. This is one of the most common mistakes that we see on policies and audits by the insurance carriers. These Class Codes are much more expensive as the NOC Classification Codes are seen as more risky. The more specific Class Codes can be a more accurate assessment of the employees covered in the policy.

If your receive a policy or premium audit with any NOC's on it, there could possibly be a more specific Class Code. The previous example could be more specific by using the Store: Clothing or Wearing Apparel Classification Code. This type of Class Code will always be less expensive than the NOC code.

The AMA Guidelines and South Carolina Governor Mark Sanford

I had posted quite a few times on Governor Mark Sanford's push to have the Permanent Partial Disability ratings based on the AMA Guidelines and not an arbitrary figure synthesized by a Deputy Commissioner.  The ratings that were given at "viewings" were so inconsistent that it made reserving the Workers Compensation files as difficult as any state.  

To be on the safe side, Workers Comp adjusters would have to reserve the files at a very high level on the permanency ratings.  The reserves were sometimes excessive.  This situation has cost South Carolina employers a large amount of premium dollars as the Experience Mods (E-Mods) were sometimes artificially high.  Even though all of the funds reserved for permanency were not spent, employers were paying premiums based of the reserved amounts, not the amount spent. As I have said before, what a company pays in premiums is based on the files reserves and NOT the amount spent.  Please search for my prior posts on Total Incurred. You may use the search box at the top of the page. 

I would often see South Carolina Workers Comp adjusters set the reserves on the file as 4 to 5 times the permanency rating. For example, say that an injured worker received a 10% permanency rating the arm.  This 10% rating would result in $6,000 being paid to the injured worker. The way that South Carolina handles the permanency rating is to have a viewing, where the Deputy Commissioner may award the injured worker 50% to the arm instead of the 10% rating given by the treating physician. 

I will post tomorrow on the status of the push for fair permanency ratings in Workers Comp by Governor Sanford. 

A Question On Workers Comp Captive Insurance Arrangements

A question from one (and I love to hear from our blog readers) of our readers on Workers Comp captive insurance arrangements -

We are a smaller employer with less than 100 employees. Our E-Mod/X-Mod sharply increased from .8 to 1.3 over the last two years. Would our small size and high E-Mod keep us from exploring a captive for Workers Comp?

Being a smaller employer or having an increasing E-Mod/X-Mod would not prevent you from exploring a captive. There are three areas that may help in your search

• Rent-A -Captive
• Association Captive
• Similar Employer Group Captive

A Rent-A-Captive is also known as a Protected Cell captive facility. It is basically a captive that is broken down into unlimited mini-captives (Cells). Each cell within the Rent-A-Captive facility can be rented for a fee. Each cell stands on its own within the overall captive. The main thing to watch out here for is the co-mingling/breaching of the assets of one cell with another cell within the captive. This protects each insured's assets from each other, and makes sure that the failure of one cell does not effect other cells within the Rent-A-Captive. This is usually regulated by law.

The Association Captive and the Similar Employer Captive are both just renamed versions of the Rent-A-Captive. A few of the associations and employer groups such as construction have sponsored great captives. Rent-A-Captives have been in existence since the 1970's.

The bottom line is that Rent-A-Captives for Workers Compensation make even the smallest employers have an alternative to the regular insurance markets.

Do Small Deductible Workers Comp Programs Really Work?

This was a question that was emailed to me earlier this week.  We have audited the policies for a few small deductible programs.  The most recent one had a $250 deductible.  The claims were still handled by the insurance carrier from the first dollar.  After examining the policy and the results of the $250 deductible, there was no difference than if the the employer had just let the insurance company pay the claim from the first dollar. 

A company cannot hold the claim on a small deductible program until it reaches the small deductible maximum and then attempt to report it late to the carrier.  This type of situation can be the recipe for disaster as a small deductible program may cause the employer to hold off reporting a very serious claim.  I have seen the late reporting on a small deductible program cause a few claims to become out of control.  A serious claim festering with the claims adjuster not knowing about the Workers Comp claim is a worst case scenario for controlling your Workers Comp claims.   

The NCCI and most State Rating Bureaus allow for a 70% discount for medical only claims as a way to encourage reporting the smallest claims.  If an employer has many medical only claims and just a few lost time claims, the 70% discount may be more attractive than the the small deductible program.  

There are quite a few states that do not allow small deductible programs due to the late reporting that may be caused by the program.   There may be a few cases where small deductible programs may be a successful part of a Workers Comp program.  I have not seen one in my career.                 

Captives Could Be The Last Haven In A Hard Market

For many years, I did not catch on to the concept of captives in the Workers Compensation market. As insurance and reinsurance markets start to harden quickly, I am of the opinion that all employers should take a look at this "hybrid" insurance.  

Captives are so named as the policyholder owns the insurance company.  This makes the insurance company "captive" to the policyholder.   

There are several types of captives - I will not define all of them here.  If you need a definition or have questions about any of these terms, please email me. 

• Single Parent Captive
  
• Association Captive 
  
• Group Captive
  
• Agency Captive 
• Rent-a-Captive 

The only one from the list above that I wanted to comment on is the Rent-a- Captive.  These are designed for smaller companies that could not afford a captive on their own.  This makes the captive market appealing to almost any company that is searching for an alternative to their regular insurance policies. 

There are quite a few reasons that captives will become more appealing for Workers Compensation coverage. They are: 

• Heavy and increasing premium costs in almost every line of insurance coverage.
  
• Difficulties in obtaining coverage for certain types of risk.
  
• Inflexible credit rating structures which reflect market trends rather than individual loss experience.
  
• Insufficient credit for deductibles and/or loss control efforts.
  

As you may notice, these are the four concerns that almost all employers now have to deal with on at least a yearly basis. Captives are not the cure-all for what ails companies presently.  They do offer a great alternative Risk Management technique for shifting portfolios of loss. 

Interestingly enough, the three top domiciles for captives are Bermuda, Cayman Islands, and Vermont. Vermont was the first state to involve itself with captives. Those three domiciles represent 47% of all captive domiciles.  The captives' domiciles is basically the primary jurisdiction of the captives. The captives are subject to a yearly audit by a consulting actuary.   

The two best benefits of a captive are cost and flexibility.  I have some reservations about the TPA's that are used by some of the captives.  They were somewhat lacking in a few areas whenever we audited the TPA's claims handling and reserving.  The file reserves are more important with a captive than with a regular insurer.  As I commented earlier this week, the captives have to be large enough or well-reserved enough to not violate the Law of Large Numbers.  A captive is a much smaller entity than a regular insurance company.  That is why the file reserves are beyond critical and the actuary must be very accurate on his/her reserve projections for the next 10 years.  Choosing a TPA and actuary are very important to the survival of the captive and its member(s). 

The most surprising development from captives occurred in 2007 - 2008.  I had thought the IRS was not going to allow the tax-advantaged basis on the reserves in a captive.  The IRS did almost a compete reversal and ruled that captives should retain their tax deductibility.  I think they realized they could crash the whole insurance market if they all of a sudden ruled that captives were to be fully taxed. 

This is much more to captive insurance arrangements.  I tried to provide a quick summary.  If you have any questions, please email us. 

    

Two Large Self Insured Groups Fail - Are There More to Come?

The Preferred Auto Dealers Self-Insured Program of California failed due to the large reduction in the number of dealers and the shrinkage of the surviving car dealers.  Due to the recent credit crunch the fund was unable to obtain an uncollateralized surety bond,  

This confirms what I posted in this blog last week on Workers Comp self insureds.   Many Self Insured Groups (SIG's) have failed even when the economy was in much better shape than now.  SlG's  often violate the law of large numbers as it applies to risk.  If there are not enough members to spread the risk, the SIG is doomed.  The Preferred Auto Dealers Program had 70 members.  In my opinion, what happened was there were enough members, but the size of the members were reduced.  

A more surprising group that will close down operations is the California  Vintners and Independent Producers Self Insurance Program of California - a 30-member self-insured group for the wine-making industry.  I was not aware the winery economy was not doing that well.  A 30 member group would not have been large enough to satisfy the Law of Large Numbers to spread the risk of claims to all members.  

In most states, the Department of Workers Compensation or Department of Insurance will perform an audit to make sure the files are reserved at appropriate levels.  Unfortunately, as I mentioned last week, the claims from a SIG will be given right back to the employer to handle.  When we have reviewed claims in this type of situation, the claims handling is often sub-par.  

I think we will see many more Workers Comp SIG's fail as reinsurance will become very expensive, if not totally unavailable.  As the economy contracts,  more employers will have to explore the regular market for coverage.  If the employers are bad risks, they may end up in the Risk Pool and pay much higher Workers Compensation premiums.                      

Workers Comp New Year Resolutions

Now that the New Year is upon us, I was trying to think of the resolutions that employers might have to save on their Workers Comp premiums.

As an employer, to reduce our Workers Comp budget, we will:

• Always review everything that we receive about our Workers Comp policies and audits
• Request that our agent forward us all policy documentation for our review
• Always cooperate with the premium audit process
• Compare our new policy with last year's policy and audit
• Review all loss runs we receive for accuracy
• Initiate first report of injury, medical referral, and return to work procedures
• Review our safety program quarterly
• Examine all types of insurance including large deductibles, captives, and all other programs available to us
• Self Insure if we are large enough to do so
• Know who our Workers Comp adjuster(s) are for our claims
• Keep abreast of any major changes in the Workers Comp laws in the states where we operate or are expanding to in the near future.

There are other resolutions that we recommend for employers. The previous list will help prevent the highest Workers Comp costs.

Workers Compensation Audits - Its That Time Of Year

With the largest number of employers renewing on January 1, the number of audits increase dramatically in January and February.  If your Workers Comp policy renewed on 1/1, you should very soon hear from the insurance carrier's audit0r for your 2008 - 2009 policy year.  

How do I know this info?  We receive many calls from employers right after their Workers Comp audits and 100% of them are not happy.  That is why we receive calls very heavily in the months of January, February, and March.  The employer has received the Workers Comp audit bill and they do not agree with the results.   If your company is in this situation, what should you do first?  

We recommend getting out your original Workers Comp policy and compare it to your audit.  Does it make sense?  Things such as a sharp increase in your payroll may make the audit bill larger than was anticipated.   

One big mistake that an employer can make upon receiving an audit bill is to ignore it or just refuse to pay it.  Insurance carriers are now very assertive in cancelling your current policy with just a few days notice for not paying the prior year's audit bill.  We do not recommend disputing the bill and audit unless there are areas on the audit that are incorrect.   

How do you know whether or not your insurance audit and bill are correct?  I have posted many blog posts about this situation.  You can use the search box at the top of this blog and search for the word audit.  This should give you a very long list of articles.   If you still are not sure, please email or call me.                              

Self Insureds And The Workers Comp System - Misconceptions Part VIII

If our company falters, a state-sponsored fund will pick up all of our Workers Comp claims and pay them.

This may or may not true.  Almost all states have some type of Insurance Guaranty Fund that will assume the handling of the claims.  The claims are paid from a special fund that comes from fees charged by the state to all self insured companies.  

There are a few states that do not have a fund for self insureds if they go out of business.  One of the main states where this may happen is Texas.  The Texas Department of Insurance has an opt-out program that allow a company to opt-out of being covered by Workers Comp insurance.  This may be high stakes as there are some very small companies that have opted out.  This type of self insurance allows for unlimited liability for Workers Compensation claims.  A small company could not afford to be hit with very many claims before they bust their insurance budget.  Some insurance carriers have provided for Workers Comp reinsurance for opted-out employers.  

As I covered last week, a Workers Compensation liability pool may be formed to cover their members' claims.  We have seen this situation occur where the employer has to cover the claims that they have already paid premiums for if the risk pool fails to stay afloat.  If one or more of the employers in these risk pools fail, the other members will be assessed very heavily to make up the difference in premiums or assessments by the pool.    

I have covered some of the misconceptions about Self Insurance for Workers Compensation.  Self insurance can save a large amount of insurance premiums if there is a proper plan in place. Well over 95% of the clients we have aided in becoming self insured have experienced great reductions in their insurance budgets for Workers Compensation.                       

Self Insureds And The Workers Comp System - Misconceptions Part VII

I thought that these three should be grouped together.  These are similar misconceptions about Workers Comp 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.
• Captives are self insurance.

PEO's (Professional Employment Organizations) are not self insurance in any way, shape, or form. An employer's employees are actually employed by the PEO.  The employees are rented back to the employer.  The employer pays a group-discounted rate as the PEO conglomerates many employers.  PEO's are more of a modified temp-to-perm agency.  PEO's are much more like a regular Workers Compensation insurance arrangement than self insurance. 

Large deductible programs may look like self insurance, but they are not in a few areas.  Your company will still receive a published E-Mod.  This is very surprising to some Workers Comp large-deductible employers that think they are out of  Workers Comp premium system.  If your company's reserves on a certain claim or an aggregate of all your claims exceed a certain figure, you will pay premiums the same as if you were not self insured. 

Captives may or may not be self insurance.  The recent IRS rulings on captives make them more similar to a self insurance program than the previous rulings.  I will likely add to this one as the IRS rulings are made on captives.  The insurance reserves and payments being tax deductible are a very attractive inducement to use captives.  The one area that is not similar to self insurance is the employer has no control over the TPA that the captive uses for claims.  We have sometimes seen very deficient claims service with the TPA that the captive chooses to use to handle their claims.