With few exceptions, Workers' Compensation insurance rates are in decline
across the country. Although rates are certainly an important component
of Workers' Compensation insurance costs, there are other considerations
companies must address during a declining rate environment.
As a starting point, it's important to have a basic understanding of
the Workers' Compensation insurance price cycle, Experience Rating, as
well as some history of this coverage's market.
The Workers' Compensation price cycle repeats over and over again in
an historically predictable pattern:
• Workers' Compensation rates rise, often with double digit increases.
• Rising rates precipitate a public outcry from business leaders
that triggers legislative reforms.
• Over the short term, these reforms create attractive market conditions
for insurance companies to increase their competitive efforts for market
share, a situation that produces price wars.
• With rates declining, businesses "shop for the best deal."
• Insurance is purchased for a lower price and complacency sets
in as employers lose their focus on injury prevention and cost containment.
• Claim costs do not fall in relation to the reduced rates, so employers
suffer from an increase in their Experience Modification Factor.
• Legislative reforms are either eroded or prove to be ineffective
in addressing the real cost drivers, such as medical inflation and abuses
in the system.
• Insurance companies' profits grind down and the "low-ball deals"
go away.
• Employers are left with fewer choices, higher Experience Modification
Factors, and higher costs.
• Inevitably, a renewed public outcry starts the cycle over again.
Historically, a decline in Workers' Compensation rates is just a calm
before the next storm. Usually businesses will pay back all of their "savings,"
and then some, as the cycle moves to the next phase.
Relying exclusively on legislative reforms and the insurance marketplace
for stable cost reduction is a fool's errand. While reforms can help in
the short term, companies with a business objective to drive down Workers'
Compensation costs in the long term must take a more proactive approach.
1. The first step is to understand that Workers' Compensation insurance
functions like a credit line. Employers are typically financing injury
costs through their Workers' Compensation policies. To understand this
concept, it's necessary to have a working understanding of how the Experience
Rating Plan works, since it produces an Experience Modification Factor
that is applied to almost all Workers' Comp policies.
The Experience Rating Plan is an integral component of the final cost
of Workers' Compensation insurance. While the underlying concepts are
complex, we can simplify their application.
In effect, the Experience Rating Plan is a method for tailoring the
cost of insurance to the individual characteristics of an employer. It
gives employers the opportunity to manage their own expenses through measurable
and meaningful cost saving programs. However, the Plan cuts both ways
and high injury costs are translated into higher insurance costs.
Actual payroll and loss data for the individual employer are analyzed
over a period of time. Usually, the latest available three years of data
are compared to similar types of businesses to calculate the Experience
Modification Factor.
In general, an employer with better than average injury expenses receives
a credit, thus reducing the premium. On the other hand, employers with
worse than average injury costs will carry a debit rating, and pay more.
What does the Experience Rating Plan have to do with the price cycle?
Due to the inner workings of the Plan, it is more difficult for employers
to lower their Experience Modification Factor during a declining rate
cycle.
The Plan expects that if rates go down, so should injury costs.
So, if injury costs don't track downward consistent with the rate decreases,
then the Experience Modification Factor goes up. An increase in the Experience
Mod can, and often does, wipe out any savings from the rate reduction.
Employers may actually find their total Workers' Comp costs going up
even though premium rates are going down.
2. To avoid cost increases during a period of rate decreases, it
is critical for employers to be vigilant and proactive in reducing injury
expenses. Ultimately, an employer's injury costs have a far greater
impact on the company's eventual net cost than reforms and rate decreases.
This fact shifts the responsibility of cost reduction from governmental
bodies, insurance companies, and the marketplace directly to the employer.
But employers often feel helpless in managing injury costs. Unaware
of processes that can dramatically improve outcomes, many view the Workers'
Comp system as out of control. It often takes an act of faith before discovering
that the strategies and methods for controlling Workers' Comp costs will
work.
Employers should approach the objective of reducing injury costs in
much the same manner as they already do for their other business imperatives.
Once knowing what to do, the tougher part is getting proven processes
implemented and embedded into every day business practices. This task,
like so many others, is an ongoing process and not a one-time event.
Reducing injury costs can be broken down into two primary categories:
what to do before an injury occurs and what to do after an injury occurs.
One of the major mistakes employers make is to hand over too much responsibility
to the insurance company in managing injury costs. Insurance companies
are neither positioned nor capable of doing this job alone, primarily
since their involvement is usually after-the-fact. Employer involvement
is essential, and begins before an injury occurs.
The key steps employers must take before an injury occurs include:
• Select and train an Injury Coordinator
• Establish a Return-To-Work Program
• Hire a person who is fit for the job
• Establish a relationship and get commitments from your Primary
Care Physician
• Train supervisors on what to do and say when an injury occurs
• Address human resource issues before an injury occurs
Steps to take after an injury occurs include:
• Follow a written, repeatable, step-by-step process
• Return the injured employee to work as soon as medically possible
even if in a modified work capacity
• Maintain positive communication with the employee and the doctor
• If an employee is not recovering according to expectations, address
additional underlying causes of the disability. It is often said, "The
best injury is the one that never happens." Employers are keenly
aware that maintaining a safe workplace is the foundation of prevention.
However, too many businesses rely entirely on traditional loss control
engineering and fail to take the secondary steps indicated above. The
majority of injuries occur from unsafe acts, not unsafe conditions.
Safe conditions are required, but inspecting and addressing conditions
alone will not bring desired results.
In summary, the most effective way to drive down Workers' Compensation
costs over the long term is for employers, medical professionals, and
employees to make the right decisions and do the right things at the right
time.
Practical and proven methods are available. Awareness, knowledge, and
possibly a dose of faith are the initial steps. No government entity,
insurance company, or even the free market system will ever produce more
beneficial long-term results.