Reducing Workers' Compensation Costs (1990)

REDUCING WORKERS' COMPENSATION COSTS Conducting a self-audit and investigating alternatives to traditional insurance. The majority of companies doing business in the United States continue to face rapidly escalating workers' compensation costs. Workers' compensation premiums are increasing at a faster pace than the total premiums for property and other lines of liability insurance. There is every indication this upward cost spiral in workers' compensation premiums will continue well into the 1990s. A number of factors have led to the escalation of workers' compensation insurance prices. They include increased benefit levels mandated by state legislatures, rapidly expanding medical costs, broader scopes of coverages mandated by individual states and more workers in the work force based on a full-employment economy. It is thus extremely important for chief financial officers, corporate controllers, risk managers and other financial officers to understand workers' compensation insurance. They must be able to compare the costs of their companies' programs to those of similar companies audit workers' compensation programs and study and suggest alternative funding mechanisms that can help reduce premiums. Even if traditional, commercial insurance is the only viable option available to a company, a self-audit of the workers' compensation program usually results in substantial savings. This article reviews the self-audit techniques that can be used to help control these costs and discusses alternative funding programs that have been used successfully by many companies to reduce costs further. WORKERS' COMPENSATION SELF-AUDIT TECHNIQUES Workers' compensation insurance rates are promulgated and designated by state workers' compensation rating boards. Standard rates per $100 of payroll are developed by the boards for different classifications of industry jobs. The rates are based on expected injury rates for a class of operations. An employee working in a production job would have a higher rate than an accountant or clerical worker would, because the production worker is more likely to injure himself or herself. The rates are provided to insurance companies. Based on the payroll for each rate classification, insurers use these rates to develop their premiums. The insurance companies can increase or decrease the rating board's standard rate, using an experience modification factor. This factor is a percentage of the standard rate and based on the difference between actual and expected loss experience. For example, if the actual loss experience for a job classification is double the expected loss, the insurance company will use the experience modification factor to double the premium. The converse is true as well. STEPS IN THE AUDIT The two major factors in premium determination for workers' compensation insurance are * Payroll classification of jobs. * Rate determination, including experience modification. Payroll classification. The first step in the audit process is to determine if the insurance company has properly classified all job functions within the insured company. Many times the insurance company incorrectly applies a higher rate than the actual job classification calls for and the insured company is charged a higher premium. To prevent this, a description of each classification as it is used on the policy should be obtained from the insurance company and matched with actual jobs at the insured company. If there is a discrepancy, the insurance company's classifications should be changed. This could reduce premiums substantially. Experience modification. The next step is to evaluate the experience modification factor used by the insurance company. If it is a debit factor, the actual loss experience of the insured company is higher than industry standards for the same job classification. …