AcuComp Reduces Workers' Compensation Premiums

 

There is better than fifty percent chance of error in nearly all workers' compensation premiums. Furthermore, it is generally thought that nothing can be done to improve premium levels and to reduce the experience modification.

Thanks to new information management system, workers' compensation premiums can indeed be lowered and then successfully controlled year after year.

For example, until recently, verifying experience modification rate calculations was a cumbersome, comes task. It is necessary for an employer to know the formula is edit each state and have access to the National Council on Compensation Insurance Manuals. However, now previous modification errors can be detected and corrected with corresponding premium adjustments. This can change the calculations of future modifiers given certain assumptions, and can be a tremendous breakthrough for those employers with high workers' compensation costs.

In addition to looking back and fixing past mistakes which can generate substantial credits, "custom" modifications can be developed by department and location to pinpoint those areas prone to loss and to determine their premium impact. This management tool is a must for those considering safety programs or other loss control measures.

In some situations, the cost to fix a problem can never be recouped in premium savings, simply because of the cushioning effect of the experience modification. The workers' compensation system is not dollar for dollar. Frequency and severity are treated differently and without a precise fix on how a particular incident effects the premium, a lot of money and time can be foolishly invested in programs that will never pay for themselves.

Finally, transposition errors, misclassifications, improper conversion of actual losses to primary actual losses, payroll audit mistakes, erroneous claimants, improper reserves, lack of subornation follow up and no compensable claims are just a few of the types of premium calculation mistakes that can be eliminated.

Workers' compensation insurance is unique because there are four parties involved: the employer, the insurance company (in all except six monopolistic states), the Department of Industrial Accidents, and various inter- and intra-state bureaus. Each group poses its own set of challenges regarding information management and workers' compensation cost control.

The complete loop from policy inception to final audit often involves information developed over the most recent four year period, possibly by more than one insurance company. This information must accurately pass from the employer to the insurance company and from there, possibly to the Industrial Accident Board and then through the various rating bureaus before it ultimately impacts the premium.

The amount, scope and type of information being processed makes errors inevitable. But those errors can now be detected and corrected, often resulting in a lower experience modification and more manageable premium levels.

The Department of Industrial Accidents is responsible through Industrial Accident Board for administering the workers' compensation law. They insure that benefits are not only fairly and equitably distributed to disabled employees, but that all rights are protected. There is less than a 5 percent chance that a disputed ca will be adjusted in favor of the employer. Every employer has at least one horror story about this state agency, and unfortunately, the stories are alike.

The employer has no "rights" at these proceedings. When submitting the first report of injury, employers' rights are transferred to the insurer. Our society tends to favor the employee in these type of proceedings which further impacts the results where the employer has no direct control.

However, it is important for employers to recognize that all to often, too much attention is focused on this one particular element of workers' compensation. For example, loss severity doesn't impact premiums nearly as much as does loss frequency. All losses over $2,009 are diluted considerably by proper application of primary rating values of actual losses, which are developed from a table of values in the Experience Rating Plan Manual.

This means that focusing on "get tough" attitudes toward a bureaucratic system that isn't about to change, is not as effective as recognizing all of the other areas of premium development that can be controlled with an information management system. The primary element in controlling workers' compensation costs is the accurate tracking of all factors that make up the final premium calculations and making sure they are correct. These elements should include plan design, premium payment arrangements and the components used in the experience modification rate calculation.

Attention should also be paid to verifying the audit worksheet and within it, the various classifications and payrolls. This means capturing and tracking all losses from the first report of injury through the end of the first three years of the most recent four year period. Finally, making sure all improper reserves are eliminated before being entered on the insurance company unit plan, which is submitted annually to either an intra- or inter-state bureau for calculation.

One word of caution. Employers are frequent targets of "one shot" workers' compensation cost control schemes that can be very expensive and totally ineffective. We have seen countless examples of programs promising savings that are arithmetically impossible!

Before considering any cost control program, an employer should contact National Insurance Advisory Services for additional information or seek professional help from those familiar with these types of programs.

James B. Conant CLU is president of National Insurance Advisory Services.