Employers have a love-hate relationship with workers compensation insurance. While the program protects business owners from lawsuits for workplace injuries, the required premiums continue to threaten profits. "The cost of workers compensation is a huge concern for most employers," says Ed Priz, president of Advanced Insurance Management of Chicago. "In some regards it is more of a widespread problem than health insurance." Unlike that optional medical benefit, workers comp is mandated virtually everywhere, except for some states that exempt the smallest of employers.
The foremost problem is, of course, the size of the premiums. "Outside of health insurance, workers comp is the most expensive insurance policy the typical employer buys," says Scott Simmonds, author of a book on the topic. It also seems to be the most problem-prone: "Everyone seems to have a horror story either on the premium side or the claims side," he says.
Experts say the most effective way to shave costs is to spot errors in the way premiums are calculated. "The insurance industry makes a lot of mistakes in providing workers comp insurance," says Priz, whose job it is to spot overcharges in his clients' paperwork. "I find that in one-third to one-half the time, the client has been overcharged somewhere along the way. That's a significant error percentage."
One of the costliest errors is misclassification of employees. In the workers comp world, different classes of workers are assessed different premiums which reflect injury risk. "There are more than 900 classifications for employees and rates are all over the place," says Simmonds. While actual premiums vary widely by state, clerical people have less risk of injury and are thus rated relatively low - with a premium often as little as 60 cents for every $100 in payroll. A manufacturer or retailer, on the other hand, might pay $5 to $6 per $100. And in construction, the cost can go as high as $25 to $40 per $100.
You can find out how your own employees are classified by obtaining the relevant document. "Normally you can request a copy of your audit worksheet from your agent, who passes along the request to your insurance company, which then sends the report directly to you," says Simmonds. This direct carrier-to-employer contact is intended to avoid having your private payroll information revealed to your insurance agent.
Check Your Records
Your workers comp premiums are affected by a second factor: your claims history. The insurance industry compares the number and severity of your workplace injuries with those of similar operations in your industry. The resulting ratio is your "experience modification" - or "x-mod" for short.
The lower your x-mod, the lower your premiums. "Many business owners aim for an x-mod of 1.0, a figure [that] indicates your claims are no higher or lower than the average," says Simmonds. "To me, though, that's like getting a `C' grade in school. I urge my clients to try to do better."
How can you lower your x-mod? The first way is to tally up your own history of claims and compare the results with those on your official x-mod worksheet. That document outlines the losses you have had, specifies your total payroll, and provides the calculations that result in your x-mod. It is prepared by the National Council on Compensation Insurance (NCCI), which then provides it to your insurance carrier, who in turn forwards copies to your agent and to you. Calculating your x-mod can be complicated, but taking the trouble to do so will assure you of the accuracy of the figure assigned you by your carrier.
You can also reduce costs by instituting a safety program that brings down your accident rate. Obtain feedback from your workers on ways to make their jobs accident-free and institute their suggestions. Using safety programs and other techniques, some employers have lowered their x-mod to 0.8 or even 0.6. "The lowest mod I ever saw was 0.48," says Simmonds. "That was for a county government in Pennsylvania. They had a tremendous program of loss control - and great luck."
Smaller businesses are often not assigned x-mods. That's because, from an actuarial standpoint, the data available are insufficient to make a meaningful calculation. At what point does a growing business enter x-mod territory? There is no one rule: The trip point varies widely and is affected by the employee classification mix. But Simmonds offers this useful benchmark: "Generally speaking, if you are paying more than $5,000 a year in workers compensation premiums, then you have most likely been assigned an x-mod."
And just how large might an employer be before reaching that premium level? By way of rough examples, an employer with two or three employees in low risk positions might be paying around $2,000 in premiums; one with 15 to 20 employees might be paying $8,000 or $9,000.
If your business is too small to be assigned an x-mod, you can still benefit from a favorable workers comp claims history. "If you have few claims," says Simmonds, "use the competitive bid process to pressure your insurance company to provide you with credits that result in lower premiums."
workplace injuries affect workers comp premiums, many employers are
tempted to avoid reporting accidents. That's bad. "Failing to report a
workplace injury is illegal in virtually every state," warns Ron
Peters, a partner in the San Jose office of Littler Mendelson, the
nation's largest labor and employment law firm representing management.
are two reasons for the illegality, says Peters. First, the states feel
that injured workers have a right to receive benefits at a level which
may be higher than what employers would provide without legislative
mandate. Second, the insurance industry needs to have a realistic way
of measuring risk for the purpose of setting adequate premiums.
is an exception, however: You need not report minor injuries that
require only first aid. "If you are in the habit of reporting
`first-aid only' injuries, then you may end up paying higher premiums
than necessary," says Peters. While such over reporting may seem
counterintuitive, the fact is that employers are often tempted to do so
out of fear that what appears to be a minor injury may turn into
something more serious. "Employers can get nervous because sometimes
it's not easy to identify a serious injury," he says.
Shop for a Deal
it comes to workers compensation insurance, shopping around can make a
huge difference in premiums. "One of my clients recently experienced a
30 percent drop in his workers comp premium, even though his payroll
had increased by eight percent," says Simmonds. "He had not been
shopping around for over six years and didn't realize that new
insurance carriers had entered his market offering lower rates.
Suddenly his current insurer, afraid of losing a good customer, lowered
his rates because of competition."
Your short list of candidates
can include carriers who have sold similar goods to others. "Talk with
friendly competitors," suggests Simmonds. "Find out who they are doing
Prudent shopping means comparing brokers as well
as carriers. "The broker you choose can make a big difference," says
Priz. "Some agents give the impression they can access the whole market
and get quotes from all kinds of insurance companies, but that may be
misleading. Often agents have contracts with only a handful of
companies and can really only market to those. As a result, you might
not get the best fit. So you need to talk with several different
insurance agents to make sure you are thoroughly covering the available
There's one last weapon in the cost-cutting arsenal:
insurance policies with high deductibles. Not all states allow such
policies, however. And even in states that do, not all insurance
carriers sell them. Again, shop around.
The cures for high
workers comp premiums vary by state. Be sure to check with your local
chamber of commerce, which may already be involved in a lobbying
program with your state legislature. If workers comp is a continuing
irritant, the prudent employer can keep a lid on premiums by taking
some rational steps.