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The Workers' Comp perfect storm

Hang on to your wallets.

Employers are already seeing the tip of a very nasty iceberg as the insurance industry feels itself reelin' and rockin' on a number of different fronts, all adding up to the "Perfect Storm:"

Okay, now for the bad news.

In 2011, the global insurance community was hammered by three of the top 11 natural catastrophes of all time; the New Zealand earthquakes, the tornadoes that ravished our nation's mid-section, and the staggering Japanese undersea earthquake and subsequent tsunamis. And the financial aftershocks-insurance payouts totaling a staggering $61.3 billion-- are just now starting to hit reinsurance costs.

If, as an employer, you are wondering how an earthquake a half-world away can affect your 2012 Workers' Comp premiums, think "Butterfly Effect" to the nth degree. Your insurer, or excess company, may be local, but reinsurers are global.

The re-insurers lost money, the self-insured programs lost money, and just about everybody took a hit. As a result, no matter what type of coverage you have, you're going to be exposed to increases, if you haven't already experienced them.

There are those who seek shelter from the storm by getting a dozen quotes. However, shopping has never helped an employer reduce injuries, discover and correct errors, returned an employee to work, reduce the experience modifier, find the right doctor to treat an employee, keep an attorney out of the system, find an agent with expertise in Workers' compensation, or improve how the insurance company views their business.

What can you do about it?

Remember, the basic tenet of insurance is a financial transfer of a risk for an amount of money. What drives your rates and increases your premiums is what the underwriters perceive as the risk. Simply put, the greater the risk underwriters perceive, the higher your rates. In the world of Workers' Comp, perception is most definitely reality. And the reality of the situation is if you don't get your company's risk under control, you're going to pay.

While rates will vary based on risk, they are not fixed in a certain profession or occupation. It's true that a retail grocer will have lower rates than an electrical contractor. But it's false that all electricians pay the same rate. For electrical contractors, the rates are proportionate to the risk. The electrical contractor who has 5% or more of his employees involved in incidents a year, lets injured employees sit at home, and does not have a true safety program in place, will pay higher rates than the electrician that goes years without incident, brings injured employees back on transitional duty, and focuses on having a formal, effective safety program in place that goes far beyond just OSHA compliance. It's astonishing how many employers say they have a safety program and a safety culture, yet continue to suffer an above average injury frequency and are hemorrhaging money to pay for injuries (a.k.a. higher premiums).

Risk profile improvement is the answer.

What you can do to keep insurance costs as low as possible is improve your company's risk profile, whether it's using PEPs, offering educational courses, limiting physical exposure to potential accidents, or monitoring the behavior of employees. You then need to address the risks in order of potential severity by implementing the proper policies and procedures. After doing so, you must tell your story so you convey to the underwriters why you are a better risk and what you are doing differently today than last year, if you expect to see your rates go down.

Your Experience Modification Factor (Mod) is also a driver of the risk perception bus, so work to control it. A Mod out of control-- anything in the 1.002 to 1.8 range-- gives the impression of an unsafe company with poor quality control and a lack of safety procedures. This will also come back to bite you in the wallet as a higher Mod means a higher premium. High mods are also used as a screening tool to prevent awards of jobs or contracts to companies and contractors.

It's critical to prove to underwriters you're committed to reducing your potential risk by concentrating on lowering incident frequency, even if it's simply by implementing drug testing and screening, doing some tool box talk, keeping minutes of safety and committee meetings, and/or stepping up the HR process to keep from hiring a Workers' Comp claim. It's all about conveying to underwriters that you have a better risk profile today than yesterday.

Also, consider hiring a Certified Risk Manager (CRM or ARM designated), and not simply a loss-control/safety person. Make certain it's someone who can both steer and direct your company towards improving your all-important risk profile. Many people, particularly those in the insurance industry, incorrectly use the terms Risk Management and Loss Control interchangeably. Yet, Loss Control is only part of an effective Risk Management ongoing process. A Loss Control person should not be called a Risk Manager, which occurs quite frequently, unless fully trained as a Risk Manager.

It's what you don't see, or pay attention to, that will cause your ship to sink. Think of the Titanic: the impact below the water line, what you cannot see, is what sunk the ship. Having standard policies and procedures in place are useless if someone is sacrificing safety for productivity or "a better result." The Titanic had superb navigational charts in place, but it was all for naught because someone was trying to make record time crossing the Atlantic.

You can't control natural disasters-or insurance company profits--and what's done is done. But you can control your company, your employees and the potential financial fallout by adopting the correct measures today. By at least righting your own ship, you may avoid the risk of sinking as this big storm continues to intensify. And no doubt it will.

This was adapted from an article by David R. Leng, CPCU, CIC, CRM, CWCA