Workers’ Compensation Insurance: A Money Pit or a Reasonable Expense?
Are you spending too much for workers’ comp insurance?
By law, you are required to provide worker’s compensation coverage for employees. However, you are NOT required to overpay for that insurance. For your company, it may be a reasonable expense…or it may be a money pit! You may be spending much more for it than necessary, or it may actually be a type of “profit center” for you. If you are a CBR client, your policy likely renews on May 1. What better time than now to discover which is true of your company.
What Drives WC Costs?
That is an important question! In order to determine if WC insurance is a money pit or a reasonable expense, it is critical to know what drives your workers’ comp costs. Base rates are driven by the cumulative losses of every company in America that does what you do! For example, if you are a plumbing company and plumbing companies experience a series of “good” years, the base rate for plumbing might decrease. You have almost no control of base rates.
Carriers may have an array of discounts and/or surcharges, such as terrorism fees, volume discounts, or renewal fees. All carriers have modifiers such as these but, again, you have little to no control of those cost factors.
The only factor you have complete control of is your experience modifier (emod). In layman’s terms, an emod is a factor that is applied to base rates that may cause your company to have much higher or much lower rates than your competitor. The key is how well you manage losses!
To illustrate, think about your auto insurance policy. Who has the lowest rates on auto insurance? That’s a no-brainer…those with no accidents and no tickets! The same is true of workers’ compensation insurance! What companies have the lowest workers’ comp rates? Those with safe work environments and no injuries!
How is an Emod Calculated?
Though the actual formula is extremely complicated, in its simplest form it compares the “expected losses” for your industry with your company’s actual losses over a four year period and computes a factor. A factor of 1.0 is average. Thus, if you have greater than the expected losses, your emod goes above 1.0. Less than expected losses causes your emod to drop below 1.0. (That’s where you want it!)
How Does My Emod Affect My Premium?
Let’s say your “manual premium” (without any modifiers) is $10,000. If your emod is 1.0 – average – you will pay $10,000. If your emod is .75 – very favorable – you will pay only $7500, while the “average” company pays $10,000. On the other hand, if your emod is 1.2, you will pay $12,000 for the same insurance for which the “average” company pays $10,000. The money pit has now sucked in $2000 of your hard-earned profit!
How Can I Improve My Emod?
Unfortunately, one bad year can blow up an emod, but one good year will not balance the scales. That is because emods “roll” through 4 years. A loss this year will remain on your emod worksheet for the next 4 years! It’s like the plague and you can’t shake it!
Three very practical ways to improve your emod over time:
- Reduce the number of injuries.
- Reduce the severity of injuries.
- Get injured workers back to work immediately.
The key to reducing the number and severity of injuries is the same: take safety very seriously and implement an Injury Free Environment. I can hear the rumble now…”It’s not possible to be absolutely injury-free!” If that is the mindset, you are absolutely right! However, with all due respect, we have worked with dozens of companies to create a paradigm shift…a change in the way safety if viewed, resulting in safer workplaces.
Just as critical, emods are very highly affected by whether or not you get injured workers back to work right away. For purposes of emod calculation, a claim that remains “medical only” will be calculated at only 30%. However, when a worker misses work due to an injury/illness and is awarded compensation for lost wages, that claim is calculated dollar-for-dollar! “Medical only” claims average less than $5000 (calculated at only 30% – $1500), compared to a “lost time” claim that averages well over $10,000 (calculated at 100% – $10,000+).
Money Pit or Reasonable Expense?
Sure, you have to have workers’ comp insurance, so it will be an expense. In your case, is it a reasonable expense or a money pit? If your emod is over 1.0, you are throwing money away. In fact, if your emod is over .85 you are paying more than most emod-eligible CBR clients.
If that’s you, why not jump on board with the idea of an Injury Free Environment? CBR can help you do that. View the webinar or contact us to discuss how you can eliminate the MONEY PIT.
