| The Eight Major Mistakes Employers Make When Workers' Compensation Rates Go Down |
Throughout much of the country declining Workers' Compensation rates are music to employers' ears. After all, that seems like long-awaited good news, particularly since Workers' Compensation is more often than not viewed as a necessity and a significant cost of doing business.
Yet, looking at Workers' Compensation as a business necessity or a commodity is a major fallacy. Although most employers fail to recognize it, Workers' Compensation is a core business practice and a means for improving the bottom line.
Rather than diverting attention and finances during periods of lower Workers' Compensation rates to other business priorities, employers can benefit by taking steps to guarantee long-term savings. There are eight mistakes employers should avoid so they can achieve long-term Workers' Compensation savings.
In a series of articles, we will examine the eight major mistakes. The fist two are as follows:
1. Confusing lower premium rates with cost reductions
Many employers are often surprised to learn that a reduction in rates does not always mean a reduction in costs. Let's begin with basic understanding of what determines the cost of Workers' Compensation insurance. Unlike other insurance, Workers' Compensation functions like a credit line to finance the costs of injuries. As such, rates alone do not determine the overall cost. An Experience Modification Factor (Mod) tailors the cost of insurance to the individual loss performance of an employer. A Workers' Compensation premium is calculated by this formula: Rate x $100 Payroll x Experience Modifier.
The Mod calculation is complex, but in general, an employer is compared with similar employers in the same industry classification and if past losses are lower than average, a credit rating reduces the premium. Conversely, if past losses are higher than average, a debit rating can actually increase costs in spite of lower rates.
2. Becoming complacent
Declining rates act as blinders for many employers. With lower prices it's easy to shift focus away from injury management and cost containment to other more pressing business matters.
While increased attention to safety led to a decline in the number of workplace accidents, which resulted in fewer claims and lower rates, claim frequency is only one part of the equation. The other part, claim cost including indemnity (lost wages) and medical care, continues to rise.
In many industries where there are tight labor markets, wage gains are expected to trend higher, suggesting further increases in indemnity severity. At the same time, medical care costs have marched relentlessly upward since the mid 1990's.
Even more disturbing is the fact that the growth in Workers' Compensation medical cost has been much steeper than in the health care industry as a whole, indicating that it is not medical inflation but a mix of services and over-utilization that are driving up costs.
If claims remain open and injury costs escalate, reserves (estimate of ultimate cost of injury) rise and adversely affect the employer's Experience Modification Factor, thus increasing costs. Employers need to understand what is impacting medical costs and measure key metrics such as cost per claim trends adjusted for diagnosis and severity. |
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To avoid these mistakes you need to focus on your experience modification and review the following items: |
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- The Mod Formula with your company's data
- The contribution of loss frequency vs. loss severity to your company's total Mod
- Demonstrate how much losses actually are costing your company in additional premium
- Explain what is driving your Mod to be higher or lower than the average company
- Show the impact that individual losses have on your Mod
- Display an aggregate loss sensitivity table which shows how your mod would change if total losses were to increase or decrease by a given percentage
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| If you are not reviewing these items on an annual basis, please contact Eastern Michigan Agencies immediately to schedule a meeting and begin reviewing your company Mod.
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