My Framework for Analyzing Workers Compensation Insurance

I’m a big believer in systems.  Each line of coverage needs its own checklist.  I was writing one of my success stories for workers compensation, and then I decided it would make sense to write down my system for Workers Compensation insurance.

Here are the factors I review when I look at a workers compensation policy:

Checklists help when analyzing workers compensation insurance programs

1.      States of operation

Each state has their own nuances… God Bless America.  They have different classifications, different rules, and each state needs to be accounted for in the insurance program.

Story of Pain:

One of my clients is a multistate nonprofit organization that operates in both Maryland and DC.  The year before they came to me, they were in a long-term relationship with another broker, until one of their employees got hurt at a DC location.

It turns out that DC was not listed as a state on their workers compensation policy.  The claim was not covered.  The nonprofit had to go to court and pay for the attorneys out of their own pocket. 

I see this issue frequently with multi-state operations.  Many independent agents never write business outside of their home state, so the rules for multi-state operations can be foreign to them.

2.      Classification of the work

Insurance companies determine how much it costs to insure an employee based on the type of work they do.  A plumber is riskier to insure than an insurance salesperson.

Sometimes this takes an expert eye to make sure the correct classification is being used.

Most states subscribe to National Council on Compensation Insurance (NCCI).  NCCI will write the definitions.  It’s up to the insurance broker and the underwriter to read the definitions and make sure that they are properly applied.

Every state has slightly different definitions.  Some states, like Pennsylvania and Delaware, write their own definitions entirely.

Story of Triumph:

One of my greatest success stories is with an outpatient mental health program.  They were classified as a home health agency.  When I discussed the issue with the underwriter, they immediately agreed with my reading of the definitions, changed the classification, and saved the insured 85% on their insurance program.

3.      Payroll by classification

Insurance companies determine the size of your business based on payroll.  An operation with $1,000,000 in payroll is much larger than an operation with $100,000 in payroll.

Making sure that payroll is properly allocated to the correct classification can make a significant difference.

Story of Triumph:

One of my nonprofit clients had both foster care placement services and outpatient mental health services.  They went through an audit and learned that they were going to owe more than $20,000. 

I reviewed the audit.  All the payroll was going to be assigned to a Social Services class code that cost $2 for every $100 of payroll.  That was not the correct read.  The payroll for their outpatient mental health program should be in a Doctor’s Office class code that costs $.30 for every $100 of payroll.

When I asked the auditor to reassign the payroll, he immediately agreed.  This saved the customer more than $17,000 on the audit.

4.      Experience Modification Factor

The experience modification factor compares you against your peers based on your claims experience.  If you have had more frequent claims or larger claims, you will pay more than similar organizations.  If you have had less claims or less frequent claims, you will pay less.

If you have an experience modification factor is over 1, you need to analyze your claims experience and understand what is causing that to happen.

Stories of Pain:

One of my clients had a terrible run of claims that drove their experience modification factor over 2.  That means they paid more than double some of their peers strictly based on claims experience.  Ouch.

5.      Scheduled Debits or Credits by underwriting

There will be a line that shows either “Scheduled Debits” or “Scheduled Credits”.  These are discounts or debits that are applied by the underwriter.

Sometimes, a debit will be applied to the account during a period of a time when a client has more claims.  If the customer cleans up their act, and nothing is mentioned to the underwriter, the debit will stay on the account. 

Story of Pain/Triumph:

I reviewed one prospect’s workers compensation program. Their experience modification factor was .71.  That means it was so good they had qualified for a 29% discount compared to their peers.

Except, there was a 25% debit scheduled on the policy by underwriting.  After further discussion, it sounded like the insured had some claims history, spent a significant amount of time and money correcting the issue, and had it under control.  But no one told underwriting… and they probably left $40,000 on the table because of it.

Conclusion:

This framework is not exhaustive.  You can also tell that the factors intertwine with each other.  Sometimes a change in the experience modification factor will impact the pricing debits applied by underwriting. 

Even so, this checklist helps me identify a lot of basic issues with insurance programs that can be easily corrected.

If you have a program and want me to review it, here is my contact information:

insuranceforentrepreneursdh@gmail.com

301-526-2046