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Managing renewals in a changing Workers' Compensation market

The 2012 Workers' Compensation marketplace ended almost a decade of relative calm in which many employers experienced decreased work comp costs and fierce competition for their business. As the cycle continues to reverse and costs increase, many employers are worried about their 2013 premiums. The "2013 Marketplace Realities" report from Willis Group Holdings P.L.C. projects Workers' Comp rates to increase 2.5% to 7.5% with increases of up to 20% in California.

Historically, Workers' Comp pricing is cyclical; therefore, indications are that increasing costs will continue for four to five years. To minimize the impact of the market shift, employers should understand the market forces driving the changes, how they impact their Workers' Comp program and what they can do. There are four major factors propelling higher costs:

Employers with a keen grasp of Workers' Comp premiums understand that "shopping" for a better rate is not the answer. Unlike most other insurance, Workers' Comp functions like a Line of Credit. Use it and you will pay back the cost of the injuries plus more; in fact, employers will pay back two to three dollars to the insurance company for every dollar the insurance company pays in claims costs. In most states, an experience rating or Mod, an actuarially based method of determining whether your company's losses (injury claims) are better or worse than expected, is used in calculating the premium.

Since the formula evaluates the company's losses over three consecutive policy years, not including the most recent year, the 2013 Mod will use data from 2009, 2010 and 2011. Six months prior to the policy expiration date, the insurance company will submit data about the company's claims during the previous policy year. If your renewal date is January 1, your Mod for 2013 is already determined. However, actively reducing your Mod today will reap reductions in Workers' Compensation insurance premiums tomorrow.

While there are administrative steps that can be taken to tighten up costs, implementing safety measures and practices that reduce claims are the game changers regardless of industry or rate environment. Simply put, those employers who have a history of claims will incur greater costs than average. And it's not just large claims. Frequency is a greater driver of costs than severity. Controlling Workers' Comp is an ongoing business practice that should be consistent in hard and soft market. If a company has a good claims record, it is going to be impacted the least when premiums increase.

Here are three things you should know to avoid unpleasant surprises on renewal:

  1. How the insurance company perceives your business

    Insurance companies are increasingly taking a customized approach to risk, looking both at the risks that are inherent in your operations and the actions you have taken (and continue) to manage and control those risks. While claims history is important, the insurance company also looks at what is being done to reduce hazards and improve safety and how effectively these systems have been implemented. Good relationships with insurance companies always helps when it's time to negotiate premiums and companies with robust cost containment efforts, including strong hiring practices, workplace safety and loss prevention programs, efficient claims administration, return to work programs, medical relationships that promote appropriate occupational treatments as well as responsiveness to recommendations from the insurance company, are in the best position.

    Employers should also expect a level of commitment from the insurance company. Keeping you informed as to the cost of specific injuries, not only will help you monitor and control the claim, but also creates a valuable visibility and awareness of costs of claims for supervisors and managers.

    In some cases, employers may look to move from guaranteed cost policies to loss sensitive plans that increase employers' responsibility for claims management and often come with high deductibles. This is not for everyone; it is an area that requires a thoughtful, systematic approach to determine if the employer is operationally and organizationally prepared to take on the additional financial risk and administrative responsibilities and if they have the robust safety culture and programs necessary to be successful. Insurance companies and agents can help you understand the differences.

  2. What affects the Experience Modification Factor (Mod)

    The costs of claims are the driving force behind the Mod and insurance companies view the Mod as a good indicator of the strength of a company's safety and claim management programs. A Mod of one represents the average risk for an average company in their industry and underwriters typically look to write those companies that perform better than average.

    An important aspect of the Mod is the split-point between primary losses and excess losses, which effectively discounts the impact of a single large claim. As an example, five claims of $10,000 each will increase a Mod significantly more than a single claim of $50,000.

    2013 takes on increased importance for NCCI-rated states as the first major change in the rating bureau's method of calculating Mods will be implemented with a focus on the split point threshold. The existing experience-rating formula sets the primary loss amount at the first $5,000 of any claim, discounting any per-claim amount over $5,000. Effective January 1, 2013, the primary loss threshold increases to $10,000, January 1, 2014 to $13,500 and January 1, 2015 to $15,000 with a post-2015 automatic inflation adjustment.

    This new rating system will heavily penalize employers with multiple claims under $10,000. Such employers should immediately strive to reduce the frequency of "claim cost drivers," such as strains and slip and falls; implement an effective return-to-work program that reduces the cost of wage-loss benefits; institute hiring and training practices that foster safety and promptly report accidents to prevent avoidable medical costs and prolonged recovery time.

  3. Mistake-free administrative records

    While controlling underlying claim costs is the big picture in long-term, sustained savings, mistake-free administrative records can help in the short-term. If the policy renewal date is January 1, your 2012 policy will generally be audited from Jan. 15 to March 1, 2013. It's important that your records be in order:

The potential for mistakes and overcharges in Workers' Compensation is higher than any other type of insurance. The items listed above only scratch the surface. Errors commonly occur in other areas as well, such as the handling of executive officers pay, unusual exclusions, multiple state coverage, etc. Proper preparation for the audit is essential.

Workers' Compensation costs directly affect the bottom line. Companies that are committed to an integrated approach of cost containment encompassing all aspects of Workers' Compensation will emerge with the competitive advantage.