When Workers Compensation Rates Decline

Here’s an interesting article written by Frank Pennachio.  Frank is our team guru at the Work Comp Advisor Group.   Feel free to contact me with any questions.

Three pitfalls employers should avoid when workers compensation rates decline

Posted on March 11, 2010 by WorkCompEdge Blog Editor

by Frank Pennachio, WorkCompEdge Regular Contributor

With few exceptions, workers compensation rates have been declining across the country for several years.  Declining rates appear to offer employers relief, especially during these tough economic times.  But declining rates can be deceiving and ultimately lead to greater total workers compensation costs. Here are three pitfalls employers should be alert to avoid when workers compensation rates go down.

Pitfall #1 – Assuming that when rates decline, premium costs will decline.

Paradoxically, declining rates may actually drive up the employer’s costs and pose greater risks to their business.  Many employers are often surprised to learn that a reduction in rates does not always mean a reduction in direct workers compensation costs.

As regular readers of this blog probably know, rates alone do not determine the premium cost. An experience modification factor (mod) adjusts the cost of insurance to the individual loss performance of an employer. The workers compensation premium is calculated to be:

Rate x $100 Payroll x Experience Modifier = Premium Cost

The calculation of the mod factor itself is somewhat complex, but its overall purpose is to compare an employer with similar employers in the same industry classification. If an employer’s 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.

If an employer’s injury costs increase, then their mod will likely increase and not only nullify the benefit of the lower rates, but actually increase the employer’s costs.  In addition, when rates go down, the employer’s injury costs are expected to go down, as well.  If an employer’s injury costs stay the same or go up, then it is almost certain the mod will increase even more.


Pitfall #2 – Focusing only on direct costs

Employers tend to focus more attention on injury prevention when workers compensation rates are increasing and less when rates are declining.  Yet injury prevention and management is critical regardless of the direction rates are trending.  Rates have little to do with ultimate workers compensation costs.

Workers compensation insurance premiums are the direct costs of funding workplace injuries.  However, when an injury occurs, the indirect costs can be much greater.  These indirect costs include:

  • overtime wages
  • temporary labor
  • increased training
  • supervisor time
  • production delays
  • unhappy customers
  • increased stress, and
  • property or equipment damage.

While it’s difficult to track some of these costs directly back to a workers compensation claim, they indisputably add to the overall indirect costs. However, employers recognize if they lose a key employee to an injury, then their business will suffer.  An employee injury is costly, regardless of the direct insurance costs, and lower premiums have no impact on indirect costs.

Pitfall #3 – Failing to recognize the threat to business

 It’s increasingly common for employers bidding on new business to find that their injury record and experience mod are important factors in whether or not they win a contract.  This is most prevalent in the construction industry; however, it’s emerging in other industries as well.  Suppliers are finding that they are not allowed to deliver goods to a business if their experience mod is above an acceptable number.

If an employer cannot secure new business or loses existing contracts, then lower workers compensation premiums are useless.  As stated above, lower premium rates imply an expectation that employers will experience fewer injuries and lower costs.  If they do not, then their experience modification goes up.  Their increased experience mod may now limit their ability to grow or sustain their business.

As you can see, lower rates can act like a Trojan horse and pose great dangers for the employer.  It seems ironic that an employer can be endangered by lower workers compensation premiums, but it is true.


Illinois Workers Compensation Insurance - FREE CD OFFER

Just to remind you....  we are offering a free CD on the Eight Secrets of Workers Compensation Insurance.  The highlights include:
  • Be Insurance Premium Audit Ready
  • Claims Management
  • Don't Hire Problems
  • Incorrect Workers Compensation Experience Modification Factors
  • Better Account Management
Click here to request your free copy or visit our website at :  http://www.workcompadvisor.com/secrets.cfm.

Learn how to control your Work Comp Rates.

Illinois Workers Compensation Insurance

Found another mistake today on a workers compensation premium audit.  

We have an employer in the Chicago area whose audit was processed incorrectly.  Even though we helped prepare the audit - somewhere in process of getting the detail to the independent auditor,  the auditor to the company, the company to the premium audit processor...  something was missed.   The owner of the company was placed in the wrong workers compensation classification causing a $3,500 mistake.

Make sure you prepare an audit package before the auditor shows up at your door.  This helps determine the accuracy of a work comp premium audit when the final results are received.  

The reason so many mistakes are made on a work comp program....

Workers Compensation Premium Audit

Insurance Premium Audit

Found another error in a Work Comp Premium Audit. A Chicago area employer was subject to the Davis-Bacon Act. Basically the Act requires paying prevailing wages on public works projects. 

“All federal government construction contracts, and most contracts for federally assisted construction over $2,000, must include provisions for paying workers on-site no less than the locally prevailing wages and benefits paid on similar projects.”

And although your Workers Compensation Premium is subject to to the higher wages - the higher benefits are not.  This Illinois employer lumped the required compensation into the employees pay and during the workers compensation premium audit – those wages were included in the final payroll numbers.   A simple over site but with $25,000 in fringe benefit costs – the additional premium was $2,200.

Illinois Workers Comp Experience Rating

The NCCI has posted a new webinar on the workers compensation experience modification - "Advanced Experience Rating".  The webinar on demand is designed to further your understanding of how the workers compensation experience modification works.  

You will learn:

  • Elements of Experience Rating
  • Valuations of payroll and claim data used in calculation
  • Various claim limitations
  • When an experience modification factor is revised
  • Why workers compensation experience modification factors change
Understanding your mod is very important in controlling your workers compensation insurance premium.  We help employers in the Illinois and the Chicago area with their workers compensation program.  If you have any questions regarding this webinar feel free to give me a call - 708.293.5500.


Free Workers Compensation CD

We're offering a free CD on the Eight Secrets of Workers Compensation Insurance.  The highlights include:
  • Be Insurance Premium Audit Ready
  • Claims Management
  • Don't Hire Problems
  • Incorrect Workers Compensation Experience Modification Factors
  • Better Account Management
Click here to request your free copy or visit our website at :  http://www.workcompadvisor.com/secrets.cfm.

Learn how to control your Work Comp Rates.


Illinois Workers Compensation Handbook

We have Illinois Workers Compensation Commission Handbooks available.  The handbook provides a basic overview and gets into detail on benefits and the claims process.

Anyone interested in a copy - email me.   dan@zeiler.com

We help employers in the Illinois and Chicago area control their workers compensation insurance premiums.  For more information visit www.workcompadvisor.com.

Illinois Workers Compensation Open House

On Wednesday 1/14, I attended the Illinois Workers Compensation Commission open house. It was the first open house that was held in many years.   After a brief explanation of their court process, we were able to observe arbitration hearings and review-level oral arguments. I also sat in a hearing in front of the three panel Illinois Workers Compensation commissioners.

In the past I have often criticized the system where benefits awarded to injured employees seem to be excessive. I felt that the system was employee friendly with minimal consideration for the employer  and how excessive claim payments affected their employers workers compensation rates and workers compensation insurance premiums.  After attending these arbitration hearings… I’ll be more cautious with my criticism.  

I was very impressed with the judges I observed. Especilay with their medical knowledge. One hearing I attended could have been a medical review rather than a couple attorneys and a judge discussing the detail of a knee injury.

If you have time – I highly recommend a visit.   More open house dates were recently announced:

  • February 11th
  • April 6th   

For more information you can visit: http://www.iwcc.il.gov/news.htm#oh


Illinois Premium Audit Correction

Are you preparing a workers compensation premium audit package? 

Found another error today for an employer in the Chicago area.  No big shakes on the ultimate premium savings but $80,000 of office (Clerical 8810) payroll was incorrectly classified in the employers store classification (Store 8017).  A rate difference of $.30 vs. $2.45 makes a premium difference of $1,700.  Hey, it's a nice weekend in Florida!

Mistakes happen...  you need to prepare your insurance premium audit before the auditor shows up at your door.  Work Comp rates are high enough - why be overcharged.

We help employers in the Illinois and Chicago area manage their workers compensation insurance costs.  Let us know if we can help you.


Control Work Comp Premiums Through Quality Hires

Employers who are concerned with controlling their work comp premiums sometimes will focus on them at renewal time or when they have received their insurance premium audit.  The reality is that the management of your premium begins when you hire someone. 

The key is to know what skills are needed for the job and to have a process in place to make the right hire.  Employers in the Chicago area are fortunate to have a large pool of potential employees to choose from but many times when discussing their hiring process, employers express frustration with locating the right person.  

Today, most position are filled by using online career sites. Monster.com, Careerbuilder.com and in the Chicago area Chicagojobs.com are all excellent resources for employers to use to find the right person.  These sites are no longer just for the large employer. 

We also encourage employers to look within their companies for the right hire.  If you do not have a process in place for posting jobs both internally and externally, it is time to put one together.  There are advantages to hiring from within which include keeping quality employees from looking elsewhere for greater challenges as well as increasing productivity and commitment.

Finally, an effective, well thought-out, employee referral program can be a gold mine for employers.  Employees will "prescreen" their referrals as most will see their referral as a reflection of themselves, providing a higher quality candidate pool for consideration. (For great referral program suggestions see: blog.bincsearch.com/.)

Your work comp insurance premiums can be managed and that process starts with hiring the right person!