Work Comp Rocket Science: Analyzing Your Insurance Purchase Decision

True confession time: we’re a bunch of nerds here at WorkCompEdge.com, Specific Software Solutions, and SIGMA Actuarial Consulting Group. And, as CEO, I suppose there's a little pressure on me to be the nerdiest of us all.

"...moving your company toward the minimum mod rivals rocket science..."

That's not a bad assignment! I like numbers, and I’ve had the opportunity to use my mathematical education in various analytical disciplines - on everything from top secret “star wars” modeling of ballistic defense systems to complex financial models in the automotive finance industry. I’ve seen math applied to support decision making in many industries and situations – often resulting in decisions that were excellent but far from intuitive.

So that background brings me to this question: how in the world do employers pick a work comp coverage provider by looking at just one number? Price, of course, is the number I am referring to.

Work comp is a complex system. Injury prevention, injury management, and moving your company toward the minimum mod rivals rocket science – and I can say that since I’ve done rocket science!

“So Tim,” you might ask, “if price isn’t the number I should be looking at to make a work comp insurance purchase, what is?” That number, I suggest, is your total cost of risk. At WorkCompEdge, we think that when you purchase insurance, you need to do two things:

• know your total cost of risk, and


• have a goal - not to buy the cheapest coverage you can find, but to engage with a business partner who will help you change your company processes to move your company to the minimum mod and the minimum premium.

This is important not only for the long term costs savings but for the many ways in which your business will improve as a result.

Within WorkCompEdge we have derived our own unique expression of the total cost of risk as follows:
The WorkCompEdge TCORW = (LR + PM + PC + PA + R + S + C + F) + (LI * 2.5)

In this formula, the direct costs include:

LR = Retained losses
PM = Minimum insurance premium
PC = Controllable insurance premiums due to the controllable mod
PA = Estimated premium adjustments
R = Risk administration allocated to workers compensation
S = Outside services related to workers compensation
C = Collateral requirements (applicable for deductible programs) related to workers compensation
F = Fees and taxes related to workers compensation

This formula also includes indirect costs of workers compensation, which have been estimated by a variety of institutions, including OSHA, to be anywhere from 1 to 20 times the cost of a loss. Some formulas for the total cost of risk exclude indirect costs because of the inherent difficulty in determining an accurate value. For the WorkCompEdge total cost of risk value, our actuarial group, SIGMA Actuarial Consulting Group, analyzed available data across a broad spectrum of industries to determine an estimate of indirect costs. This estimate is simply:

Indirect Costs = 2.5 * LI

where LI = The total incurred loss amount for the period analyzed

In many cases, this formula will underestimate the indirect costs. However, here at WorkCompEdge, we decided that some measure of the indirect costs of workers compensation losses is a critical portion of the overall equation.

The purpose of knowing your total cost of risk is to see the long term impact on this number in different scenarios. The goal is to minimize this number. Buying the cheapest insurance is not likely to result in reaching your minimum total cost of risk. Working with an agent and insurance company that supports your effort to implement WorkCompEdge-type strategies will launch your company (pun intended!) toward minimizing your total cost of risk over the long term.

If you’re a WorkCompEdge member, be sure to look at our Avoid low bid mentality module for more about this topic, including a handy-dandy workbook to help you calculate and play what-if scenarios with your total cost of risk.

http://www.WorkCompEdge.com
http://www.SpecificSoftware.com

How We Know What Isn’t So

In the development and ongoing support of WorkCompEdge, we have questioned and will continue to challenge everything that is assumed true in the workers compensation industry. This process of questioning is a key factor in enabling us to present work comp strategies in a straightforward, factual, systematic way.

A book I read during the development of WorkCompEdge strongly influenced my thinking on this subject of “what is true.” How We Know What Isn’t So: The Fallibility of Human Reason in Everyday Life by Thomas Gilovich does a masterful job of highlighting how many things we believe that “just ain’t so.” Here is a great example that Gilovich starts with in his introduction:

"It is widely believed that infertile couples who adopt a child are subsequently more likely to conceive than similar couples who do not. The usual explanation for this remarkable phenomenon involves the alleviation of stress. Couples, who adopt, it is said, become less obsessed with their reproductive failure, and their new-found peace of mind boosts their chances for success.

On closer inspection, however, it becomes clear that the remarkable phenomenon we need to explain is not why adoption increases a couple’s fertility; clinical research has shown that it does not. What needs explanation is why so many people hold this belief when it is not true."

We all use intuition and seek to “prove” that our theories and preconceptions are true. We often do this through a biased sorting of data and evidence. Without knowing it, we look for what supports our ideas and reject information that conflicts with our beliefs. But as dysfunctional as this process may sometimes be, it is also the process that develops our intelligence - a fascinating human dilemma.

Frank's blog and the subsequent comments in Are Bad Employees Really the Main Problem in Workers Comp? are just one example of how this process is manifested in workers comp.

So, here are my questions for you:

• Where in the workers compensation industry are we relying on theories, perceptions, and biases that are NOT backed by hard evidence and objective facts?


• More importantly, where are the most costly places where this occurs?

I would be interested in hearing your thoughts. And, if you really want to challenge yourself, pick up this book (here on Amazon or through your favorite independent bookseller) and better understand How We Know What Isn’t So.

Editor's note: This is the first entry in our new "Books" category inspired by reading we've enjoyed and in some way applied to business, workers comp, learning, personal productivity, wellness, and more. If you have a book to suggest, let me know!

http://www.WorkCompEdge.com
http://www.SpecificSoftware.com

Does Claim Count Affect the Mod? The Answer May Not Be What You Think

(The following relates to experience rating in states that use the NCCI or similar rating methodology.)

“Do zero-dollar claims have an impact on the mod?”
“Do the number of claims directly impact the mod?”
“Claim frequency affecting the mod is a myth – isn’t it?”

These variations on the same question are very common here in the support department of Specific Software - from both our WorkCompEdge beta users and our ModMaster users. It’s a confusing issue because while the answer is officially “no,” it can also appear to be “yes.” Let me explain.

Experience rating does
not directly count the claims.

Experience rating does not directly count the claims. Don’t be misled by the fact that the experience rating worksheet often shows a claim count for small losses. This is for documentation purposes only, as far as the experience rating formula is concerned.

When you look at the formula itself, you never see claim count as one of the variables. Instead, experience rating uses a system called “split rating.” Each loss is split and put into two buckets: primary and excess. In most states that use the NCCI or similar formula, the first $5,000 of each claim is placed in the primary bucket while any loss amount over the first $5,000 of a single claim is put into the excess bucket.

A zero dollar loss has absolutely no impact on the mod because there is no loss amount. However, the number of claims, when the loss amount is greater than zero, is indirectly measured by the amount of dollars in the primary bucket. Here’s a brief example:

Employer A: $100,000 in losses. 2 claims - $40,000 and $60,000.
Employer B: $100,000 in losses. 20 claims - $5,000 each.

The two employers had identical total losses, but Employer A will have only $10,000 in primary losses while employer B will have $100,000 in primary losses. Employer B’s mod will be much higher than employer A. This is due to the frequency of claims as measured by the amount of primary losses. So, the claim count does matter, but it is never directly included in the experience rating formula.

To take this illustration just one step further, let’s consider:

Employer B: $100,000 in losses. 20 claims - $5,000 each.
Employer C: $100,000 in losses. 100 claims - $1,000 each.

Because ALL of these claims in both cases are less than the $5,000 split point, the formula doesn’t measure any effect of 20 vs. 100 claims. If all other things (i.e., payroll and loss rates) were the same, Employer B and Employer C would have the very same mod. So in this case, the claim count doesn’t matter – but only because all claims were under the split point.

WorkCompEdge members can learn more about this issue and access an online tool for analyzing the mod in Learn the Lessons Your Experience Mod Can Teach You.

Keep Taking Our Quick Survey!

Thanks to those of you who have participated in our quick survey we posted last week - and to those of you who let us know when there was a slight glitch with it. If you haven't taken it yet, please do! So far, responses are all over the board. We're hoping that more responses will help shake out some identifiable trends. The survey is for both insurance professionals (to answer on behalf of their clients) and employers themselves. Take it now.

http://www.WorkCompEdge.com
http://www.SpecificSoftware.com

What Do You, Dilbert, and NCCI Have in Common?

Hmmm..what do you, Dilbert, and the National Council on Compensation Insurance (NCCI) have in common?

That question might keep you guessing for a while, and we know your time is valuable. So here's the answer - you're all helping identify what's trendy in work comp:

• Dilbert because he's talking about wellness programs;


• NCCI because they've recently released reports on claim frequency and severity trends for 2007 (as reported in this Insurance Journal article on August 4th);


• And you because you're going to take our quick survey (so nice of you, we do appreciate it!)

If wellness wasn't already a hot enough topic, even Dilbert is talking about it this week. Here's Monday's strip; check his website (on your own time, of course) for the continuing theme. Here at WorkCompEdge, we're kind of hoping Dilbert creator Scott Adams might tackle early return-to-work next.

Admittedly, trendy may not be the best word to apply to good work comp practices, but here at WorkCompEdge we're definitely interested in identifying trends that can lead to improved work comp costs and outcomes. Both of these items in the media this week directly apply to select content in WorkCompEdge - see the modules A new paradigm - promoting the health of your workers for wellness and Expedite return-to-work and The clock is ticking for strategies to address the loss severity problems that NCCI reports. But even if these are topics that people are talking about, we have to wonder if they reflect true action on the part of our readers and their companies. In other words, are you (or your clients) practicing the work comp strategies that we're preaching?

Trendy or not, we want to know what's going on with you. Whether you're an employer or an insurance professional who can share a perspective on your clients, please take our quick survey now. We'll share the results in a future blog entry!

http://www.WorkCompEdge.com
http://www.SpecificSoftware.com

Playing by the Rules for Fun and Profit

The recent posts to the WorkCompEdge blog and forum about Vicki's premium audit experience struck a chord with me. Sometimes it gets terribly lonely feeling you are the only sane person engaged in a dialog. There have been many times in my experience as a work comp agent when I’ve wanted to throw my hands up and say to an auditor or underwriter, “What color is the sky in your universe?”

In other words, “What are the rules you’re playing by?”

Now, before any auditors or underwriters get upset with me, let me be quick to point out that they do have rules, and they are playing by those rules. From my perspective, those rules sometimes require me to suspend common sense and my orientation toward what seems fair as I address issues related to a workers compensation insurance policy. But I’ve already wasted too much of my life force debating fairness and common sense with insurance company underwriters and auditors.

You've got to know those rules! If you have trouble viewing the video, try this link.

What I’ve come to appreciate is that the rules are the rules regardless of what may seem logical or fair in a certain case. So, instead of cursing the dark, let’s turn on a light. Our best strategy – as employers and the agents or other professionals who help employers - is to learn the rules.

This could not be truer than in the premium audit process. Commonly, numerous rules are never explained to the employer; sometimes, those numerous rules are executed incorrectly, resulting in overcharges to the employer. In no way do I suggest the auditor or insurance company has nefarious intentions. It’s simply a difficult business challenge – for both insurance companies and employers - to complete an accurate premium audit.

Premium auditors have a thankless job. They are not usually treated as a welcome guest when they arrive, but as an interruption to an already busy day. Auditors are usually facing deadlines and under pressure to get audits done fast. Pressure to get things done fast does not create an environment conducive to education and accuracy.

As an employer, therefore, you must commit to educating yourself – and following through with the processes that will assure an accurate audit.

If you’re a WorkCompEdge member, there’s a module and workbook to help you do that. But as Vicki’s experience attests, you can also root out this information from manuals from the appropriate rating bureau (such as the NCCI Scopes Manual). I heartily agree with her mention of the Ed Priz guide as a great way to become familiar with the process. Here’s a sampling of issues that, when addressed appropriately, may save you money:

• Are your employees classified appropriately for their job function? If your administrative assistants are accidentally placed in the same class as your construction workers, then you’re being overcharged. If any subcontractors – who in almost all cases should have their own wc insurance – are listed on your audit, then you’re likely being overcharged.
• Are your corporate officers exempt or non-exempt from workers comp insurance?
• Are excluded remunerations – such as tips, incentive payments, employee discounts, payment for active military duty, certain overtime payments and a host of other things – really being excluded from your audit bill?

Kory and I entitled this entry “Playing by the Rules for Fun and Profit.” We have to admit that maybe there’s not a lot of fun in navigating the intricacies of a premium audit – but those same intricacies really can be a source of overcharges you can eliminate. And who doesn’t have fun saving money?

Are your premium audit experiences an aggravating mystery to you, a triumph of good recordkeeping and cost savings, or something in between? Let us hear from you.

http://www.WorkCompEdge.com

Meet Work Comp Hero Vicki Hagan

In this blog entry, we introduce a new feature we're calling "Work Comp Heroes" which will focus on individuals who are making a difference in workers compensation costs or productivity for their employers or clients.

Nominate your
own Work Comp Hero by emailing
blog editor Kory Wells.

Our first Work Comp Hero is Vicki Hagan, a WorkCompEdge employer member from Crossville, TN. When Vicki joined Action Heating & Cooling, Inc., in 2004, she inherited a mod of 1.40 - and a disputed premium audit bill of $12,000. "I knew absolutely zero about work comp insurance," Vicki says. She rushed to educate herself, searching the Internet, downloading ebooks, purchasing books, borrowing a Scopes Manual, and calling on NCCI and the state Commissioner of Insurance for information.

Although it took a lot of persistence, Vicki was able to obtain a second audit from the insurance company. Their final audit bill was less than half the original.

After that, Vicki developed Excel spreadsheets (similar to the WorkCompEdge premium audit workbook) to perform a mini-audit of payroll and renumerations on a weekly basis. "So," she says, "when the auditor sits down in my office, I have a neat, tidy package to hand over, and he or she knows how proactive I am about controlling our costs. It simply works!"

Work Comp Hero: A Profile

Name:Vicki Hagan

Company:Action Heating & Cooling, Inc., Crossville, TN

Type of Business: Heat and air installation, maintenance and repair for both the residential and commercial sectors

Number of employees: 22 full-time employees; 7 part-time or seasonal employees

Job Description: As is common in small business, Vicki wears a lot of hats...Accounts Receivable/Payable, Comptroller, Human Resources Manager,"Insurance Battle Queen", Computer Tech, Advertising Manager, Office Manager, Loss Control Officer.

Mod History: Inherited a 1.40 mod in 2004; current mod is 0.84!

Recommended work comp resources (other than WorkCompEdge, of course!)
Vicki says:

• Scopes Manual (if you can afford one, or are lucky
  enough to have a friend with one you can borrow!)
• NCCI (Maureen Longenacre was a tremendous help to
  our company during our 2004 audit battle)
• Master Your Workers' Comp Modifier booklet by
  Specific Software Solutions (in conjunction with the ModMaster
  software)
• Ultimate Guide to Workers' Compensation Insurance:
  Secrets of Reducing Workers' Compensation Costs by Edward J. Priz (he's
  awesome!)

Best Advice: Vicki says: "A fool and his money soon part ways. As easy as it is for a person to educate himself/herself these days with the help of the Internet, there is no excuse for someone to dread a WC audit, and even more so, the WC audit bill. With an education and a little bit of daily effort, it is very simple to control your workers' comp
costs. For our 2007 audit period, we actually received a refund from our insurance company! How's that for proof in the pudding??"

She also says, "Never give the auditor more information than he/she asks for...and never just let him/her wander around the office. Have a specific place for them to work while at your office." That's advice you'll also find in the WorkCompEdge module "Eliminate overcharges by taking control of the premium audit."WorkCompEdge members can learn more of Vicki's experiences - and view other member comments in the forum topic Ensuring Correct NCCI Codes at Policy Issue.

Several of us here at WorkCompEdge have talked to Vicki, and we've all come away impressed with her passion for work comp issues. We thank her for sharing her insight and experience with us!

Work Comp Heroes can be found in all sorts of places - working for an employer in HR, accounting, or on the factory floor; working in an insurance agency, insurance company, or other risk management position. They might be heroes because they save money, because they have a stellar record on safety, because they've inspired co-workers to quit smoking or lose weight, because they are empathetic but firm leaders...you get the idea. Nominate your Work Comp Hero by emailing blog editor Kory Wells and telling us a little about the person whose story inspires you.

http://www.WorkCompEdge.com

Legally Correct: How Your Hiring Practices Affect Your Work Comp Premiums

In the popular 2001 film “Legally Blonde,” Elle Woods (played by Reese Witherspoon) is a stylish sorority girl who, in a quest to get back the guy who dumps her, discovers her true potential way beyond the stereotypes of her blonde mane.

If you're just crossing your fingers that you've hiring a candidate who's medically fit for the job, don't be surprised if you find yourself with costs related to a new or pre-existing injury.

When we employers are interviewing job applicants, we likely have a movie running in our heads that I call “Legally Correct.” Delving below the surface to discover a job applicant’s true potential can feel like tricky business. This age of political correctness can make the most eloquent orators among us stumble. More importantly, there are EEOC guidelines to worry about: What questions we can ask. What questions we cannot ask. While we are trying to determine if an applicant has the abilities and personality to fit in our company, there’s another aspect we often overlook: whether they are medically fit for the work we need them to do.

I can hear you now: “Frank, I can’t ask someone their medical history.”

You’re right. In most cases, you can’t – not until you make them a conditional offer of employment. But after you do that, your applicant should undergo a medical screening to make sure he or she is fit for the specific functions of the job you want to hire them to do. This is a legally correct and – I would argue – moral thing to do. This process will weed out an applicant who truly is not fit – or who has intentions of filing a claim on a pre-existing injury after they’ve been with you a few months.

Most large employers have been doing medical screenings for a long time. But I find that a lot of my small business clients learn about this the hard way.

Here’s a real life success story: I recently met with a client to renew his company’s workers compensation insurance policy. In 2003, this client was paying over $480,000 in workers compensation premiums. The company was scrambling to find an insurance company that would offer them a renewal policy: their experience mod factor was 1.63. If they didn’t get an offer from the voluntary insurance market, then they’d be driven into the assigned risk market, where their cost would exceed $800,000.

Fast forward to 2008 and the story is dramatically different. The company’s projected premium cost for the upcoming year is under $200,000. Their experience mod factor is 0.85.

I asked the Chief Financial Officer what he felt were the major factors influencing this turnaround. Without hesitation, he said, “Beefing up our hiring practices and returning injured employees to work.” (In my next blog, we’ll talk more about back-to-work programs. As Jim mentioned in his comments to my last blog entry, it’s all about expectations.)

You notice the CFO didn’t make any reference to safety? Not safety committees, safety programs, or safety inspections. This company’s problems didn’t arise from an unsafe workplace, and they already had a positive corporate culture.

Now obviously, creating a safe workplace is a foundational and necessary step to any business. But, employers often don’t understand that the safest workplace in the world will not overcome hiring an employee who isn’t a good fit for the job.

Let me hear from you. Do you or your clients use “Legally Correct” pre-employment medical screenings? What’s your experience with them? Have you seen their implementation improve your claims history and premium costs? Is there a down side to medical screenings that I haven’t mentioned?

http://www.WorkCompEdge.com