Why Are The Loss Runs Needed As Part Of Your Workers Comp Audits For Employers?

We receive this question often when we are obtaining the materials that we need to do the Workers Comp premium audits/reviews for employers. We also like to go more in-depth than the insurance company's auditor. The reason that most premium audit companies ask for loss runs is to make sure that the loss runs provided by your carrier resulted in the exact same numbers on your E-Mod/X-Mod sheets.


In the past, there were errors made when the insurance carriers and rating bureaus transferred the claims loss numbers from the insurance company loss runs to the rating bureau Experience Modification sheets. The Unistat Report is what the insurance carriers report to NCCI or the State Rating Bureaus. This type of error is not as prevalent as in the past. However, it does happen. The largest recent one was the NCCI rating sheets for New Hampshire employers five to seven years ago.

One of our services is to also review the claims loss runs to formulate a plan on how to reduce your claim reserves. It is almost impossible for us to go back in time and try to negotiate down a Workers Compensation reserve figure. The reserving exists in the present only. If any company tells you that they can negotiate down PAST reserve figures, that should raise a few questions as no insurance carrier will allow a reduction in past reserves.

The best way to keep track of the reserving by the claims department is by having online access. As I have said before, the claims loss run is no different than any other type of financial statement and should be treated exactly the same as a bank statement. Please see the recent post on online access.

What Is The One Thing That We Can Do That Would Harm Our Workers Comp Program?

I received this question last week. This is one of the unasked questions that are always a concern of most employers. When we examine Workers Compensation insurance policies for employers, there is one area that I always see where large mistakes occur in the policy process. The mistake is just writing a check for a Workers Compensation bill - especially a Workers Comp audit bill - without even questioning how the insurance carrier or premium auditor calculated the amount. As I have mentioned in many blog postings previously, you must treat your insurance policy billing statements the same as a bank statement.  If your company does not, then you are likely overpaying for Workers Comp coverage. 

We just finished an audit where the employer wrote a check for over $50,000 because the insurance carrier sent them a bill. We found on this one, as we do many, that there were some miscalculations during the audit. The true bill ended up being less than $20,000. We do see this more often in recent times. 

We recommend at least asking for backup documentation on how the Workers Comp policy or audit bill was calculated.  There may be no errors. At least you can feel good about knowing that you at least reviewed the documentation that justifies the billing. 

We usually say "Just Do Not Write A Check" as one of our mottoes we have mentioned in articles and previously in this blog post.  At a time when every penny counts more than ever, make sure you feel 1,000% comfortable with writing the check.  If not, start asking questions.  You may be very surprised at the answers and the results for your company.   

What I Noticed At The RIMS Conference

I traveled to Orlando FL this week for the Risk and Insurance Management Society (RIMS) conference. There were a few things that I noticed in the one day that I had time to attend the conference and all of the activities.

Overall, I saw no reductions in the opulence of the snazzy booths by the vendors. I am thinking that the larger companies have cut back by not attending smaller conferences. There was no economizing at this conference. Why would there be though, if the vendors were allowed an opportunity to talk to thousands of risk managers at one place at one time. I would have gone

all out, too.

AIG had a vendor booth under the name AIU. Most of the risk managers that attended had made the comment on AIG that I had posted often about in the past. The insurance sector of AIG was not failing. It was the financial products section of AIG that failed so miserably that they took down the insurance services section with it.

One of the other topics that the risk managers were discussing is the overall contraction of the Workers Comp premiums due to the shrinkage of their respective company. They were expecting that premiums would decrease. That may not necessarily be true as the complexity of the medical costs of claims have increased and have offset the diminishing payrolls. This offset will show up in the E-Mod as it will increase and offset the smaller payrolls. I stressed to every Risk Manager that I spoke with that Workers Comp has a somewhat delayed cycle of charging premiums. What is happening now will show up in their premiums for the next three or four years.

With diminishing payrolls, the ELR or Expected Loss Ratio will actually adjust down. This will also have an offsetting role in the E-Mod. Companies with less payrolls are expected to have less claims. This is not one-for-one calculation as the ELR will decrease more rapidly than the payrolls. As with most costs, the smaller companies pay substantially more per unit of coverage than larger companies. That is the way the Workers Comp premiums system is constructed.

There are quite a few articles on this blog about cost savings on Workers Comp. It may be worth using the search box to see how to reduce claims dollars and other ways to save $ on premiums.

Colorado Makes a Great Workers Comp Move For Employers

Senate Bill 37 is a measure that begins the process of slowly eliminating a surcharge that Colorado businesses pay on workers compensation premiums. SB 37 was unanimously approved by a House of Representatives panel on Tuesday.  The legislation, which was already approved by the Senate, must be heard by the House Appropriations Committee before advancing to the House floor.

According to the Denver Business Journal, SB 37 would gradually phase out a 2.98 percent surcharge on premiums that companies pay for workers-compensation insurance. The surcharge currently generates about $34 million a year.  That $34 million could be back in the bank accounts of the businesses in a very bad economy. 

The fees fund two reserves that are supposed to cover the cost of catastrophic losses from workers compensation claims.  But the program was eliminated 16 years ago and has not accepted a new beneficiary since that time, leaving nearly 700 surviving beneficiaries to draw from the fund.

According to the Denver Business Journal, "In recent years (including this year), lawmakers have used the reserves as a “slush fund” to cover budgetary shortfalls. Supporters of SB 37 argue it’s wrong to plug budgetary holes on the backs of Colorado businesses."  I would have to wholeheartedly agree. 

I wonder how many other states are tacking on unnecessary Workers Comp fees to the detriment of the states' businesses.  In our Work Comp Audit reviews, we often see so many fees stacked on to the manual premium. Any the fees charged to employers that can be reduced or eliminated is a great idea.

If you know of any fees such as these, drop me an email and I will bring it up in a future blog post.  I will likely have two or three more posts on this subject.         

Workers Compensation Audits - How Many Is A Carrier Allowed Per Year?

We received this question recently from a manufacturer in California.  The number of Workers Comp audits that can be performed by a carrier should only occur once per policy year.  The Workers Comp policy that you have received from the carrier should have all the Workers Comp audit rules in it.  It is usually in the last few pages.  Each state has its own set of Workers Comp audit rules.  

A very interesting fact we have noticed is that some agents have included on the policy that a certain insured should be audited more than once per year.  If your company is being audited more than once per year, check your insurance policy to see if more than one audit has been scheduled for the policy year.  At the next renewal,  request that your agent change the frequency of audits to reduce the number of audits per year.  Some carriers require that certain employers be audited more than once per year.  Those are rare.    

In reality, the insurance carrier may perform an audit or audits any time during the policy year and for the last three policy years.   Usually Workers Comp insurance carriers will not audit for the prior years and instead center on the policy that has just expired. 

We heavily recommend that you do not try to ignore the audit requests by the carrier or any audit billing.  If you do not allow the insurance carrier access to your company's payroll records, the insurance company may cancel your policy and charge a very huge penalty until they are allowed access to your payroll records.   The auditor has a time limit to perform the audit.   If there is a large delay, the premium auditor may just do an estimated audit and then triple the premium owed as a penalty.  This is allowed in every state's insurance laws and rules. 

Even in the very bad economy, insurance carriers will likely let you pay off an audit bill over time.  Please make sure that you call the carrier before the due date of the bill if you are unable to pay it in full. If you are disputing any part of the work comp audit bill, it is a good idea to pay the undisputed part of the premium.  It is not only a good idea, but is required by rule.                  

Your Workers Compensation Loss Runs

I have posted very often on Workers Compensation claims loss runs.  Why?  Whether your company has a regular Workers Comp policy or a self-insured/large deductible program, your loss runs are a very important financial document and should be treated like a bank statement. 

If you do not have full  online access to your Workers Compensation claims, loss runs are the only documents that will inform your company of how your Workers Comp program is performing. In fact, full online access to your claims is worth approximately 20% of your premiums when comparing Workers Compensation carriers.   

Having full online access to your claims includes having the change of reserve documentation available.  This is very important as almost all systems that allow access to the reserve changes will show a breakdown of how the reserves were calculated.  Full access is very important if you are going to have a company perform a claims analysis.  Not only will full access save your company billable hours, but it will aid in negotiating down the file reserves.  

If you have a TPA handling your claims, your company owns all of the claims data and should have access to all of it except certain information such as medical records. Your workers comp claims files should be an open book that you can fully view all adjustment actions on the files at all times.  

I always recommend that any company that does not have online claims access or do not know how to access the claims should obtain a username and password from their insurance carrier or TPA. You can usually email the Workers Comp adjuster if you have questions on the file from inside the online file.  I always recommend emailing the adjusters as you will have documentation and the adjuster can look at the file before responding.  Calling an adjuster will only cause them to have to look at the file and call you back.  That is why we do not recommend phone calls.     

If AIG Crashed, Would The Rest Of The Insurance Market Fail?

An interesting article was published recently in P&C - National Underwriter.  It was a shocker.  

The American Insurance Association and Property Casualty Insurers Association of America (PCI) argued their point to Congress.   Their conclusion was if AIG's property and casualty operations failed, there will be little effect on the property and casualty (P&C)  markets as a whole.  The P&C markets did not suffer the same systemic problems as the other financial markets.  As I had posted previously, it is the financial part of AIG that had failed and started the AIG meltdown.  The P&C part of AIG was never in trouble. 

AIG in its justification for additional aid argued that “AIG continues to pose a systemic risk” and requires immediate additional federal assistance; otherwise its failure would cause “multiple and potentially catastrophic unforeseen consequences.”

The presentations to the leadership of financial services congressional committees were made in response to a document provided to the Treasury Department and Federal Reserve Board by AIG to justify an infusion of additional funds to the company as it reported a $61.7 billion loss.      

The conclusion of the article was that the life insurance operations  part of AIG would cause quite a ripple in the life insurance market, but not the P&C markets.  There is enough capacity and market forces that would be able to absorb the failure of AIG as when other P&C companies have failed in the past.   

Could there be more AIG's in the P&C markets?  I do not think so, as there was never a failing P&C part of AIG.   The life insurance part of AIG is not considered in the analyisis of their P&C operations.     

What Can We Do To Lower Our E-Mod?

This is a question I received from one of the blog readers after I posted the Workers Comp E-Mod or X-Mod Factor formula earlier this week.  This will fit well into the post that I was going to do on breaking down the E-Mod formula. 

If you look at the Experience Modification Factor formula, you will notice that most of what is on the top of the fraction is also on the bottom of the fraction.  The real difference is that E-Mods and and X-Mods come down to the actual losses divided by the expected losses.  There are many other values in the formula so it is not quite that simple.  Reducing your actual losses or increasing your expected losses is important.   Even more important is reducing the number of losses that reach $5,000.00.  This is known are the Primary Loss portion of the claim. 

The Actual Primary Losses are what costs your Workers Comp insurance program the most premiums due to an increase in the E-Mod.  The Actual Excess Losses still cause a rise in the E-Mod, but not as significantly as the Actual Primary Losses.  How does this happen the Excess Losses have a discount factor of sorts built into the E-mod equation.  Whew!

Let's get back to how to save Workers Comp $.  The ways that you can reduce your Workers Comp E-Mod are:

• A devout safety program - an accident that never happens saves you 100% of the $ compared to if the accident did happen. 
• Using the Four/Five Keys to Saving Workers Comp $ - you may search for those blog posts using the search box. Type in keys
• Reviewing your claims loss run every time your receive it<<
• Know when your Workers Comp reserves actually affect your E-Mod also known as the Unistat date.    
  
• Make sure your Workers Comp payroll figures are accurate.  There is a big difference between actual payrolls and Workers Comp payrolls. 
• Make sure your Workers Comp classification codes are correct.  The SIC or NAICS codes have very little to do with your Workers Compensation Class Codes.  

The last two bullet points have more to do with adjusting your Expected Primary and Expected Excess losses.     

Next Up - Do Not Be Fooled By A Small Claim Reserve            

Third Party Administrators (TPA's) Under Pressure Due To The Recession

In our claims reviews for employers, we have noticed an interesting scenario developing recently.  

One area that many insurance personnel and analysts overlook is the increased internal pressure on a TPA's claims staff.  In a recession, the number of claims may lessen. According to recent analyses by the NCCI, the dollar value of those claims increases enough to offset the decrease in volume.    

The handling of each file intensifies causing most claims staffs to have the same amount of work, but with less claims. With TPA fees decreasing due to volume, how long can a TPA keep the same level of staff to handle the declining volume, but with more complicated and lingering claims? 

I have seen technology being mentioned as one of the answers to this problem. However, there is only so much technology that can assist the "hands-on" adjusters and support personnel in handling the claim loads. 

Usually, I will include an answer to a problem. I am not so sure on this one. Heavily increasing the file loads on the staff is not the answer, but only a quick-fix.

You can easily tell when an adjuster has reached their point of being overloaded.  They lose the ability to communicate efficiently on all files and to their supervisors/managers, which causes the TPA's clients to pay more than is necessary on their claims. 

The Experience Mod Equation Looks Complicated - Is it?

I  have been asked often how the Workers  Compensation E-Mod/X-Mod is calculated.  I am also usually asked why a certain company's E-Mod increased so dramatically.   The E-Mod individualizes a company's risk to that company.       

The E-Mod is calculated figured from the following formula:

Actual Primary Losses	+	Ballast Value	+	Weighting Value Times Actual Excess Losses	+	(1 Minus Weighting Value) Times Expected Excess Losses	=	Total A
-------- Expected Primary Losses	+	------- Ballast Value	+	------------------- Weighting Value Times Expected Excess Losses	+	------------------ (1 Minus Weighting Value) Times Expected Excess Losses	=	------- Total B

For the E-Mod, divide Total A by Total B.   I will break down the formula later this week and what employers can do to lower their E-Mod.         

This Is Not The Way Workers Compensation Is Supposed To Operate

I could hardly believe my eyes when I read that the Maryland State Senate had passed a bill that will establish a unit with the State Department of Labor allowing labor inspectors to forcibly enter into a business without notice and review their Workers Compensation records.     

The supporters of the bill say the bill would allow the state to monitor which businesses are not paying into the state's workers compensation insurance fund that pays claims. Violators could be fined up to $5,000, under the bill. There are many other ways to track the businesses that are not paying Workers Comp premiums. Maryland's' government can easily search through computer records of the businesses and then match them to the Workers Comp records.  There is no need to have government inspectors bust into businesses like a raid to see what Worker's Comp records can be found and if they pass some type of litmus test.  

I have seen in many states where the governments are trying to figure out which businesses do or do not have Workers Compensation insurance.  West Virginia did a very commendable job in searching out and dealing with Workers Comp insurance violators.  I remember reading about the Department of Insurance posting signs on the front doors of West Virginia businesses that informed their workers and the public that the company did not have Workers Comp insurance.  How did the Department of Insurance know that these businesses did not have coverage?  They matched it to other computer records.  Maryland should take note of what West Virginia did to enforce their Workers Compensation requirements.       

Opponents of the bill say the measure would allow the state to inspect home based businesses without notice. I do not think that the inspectors' jobs would be to barge into a home based business as the focus would be larger businesses.   .  

The bill now goes to the House of Delegates.  Hopefully they will turn this onerous bill away. 

I try to stay very general in the blog except when there is such an unfair development in a certain state that would be very disadvantageous to businesses.