Workers’ Comp Rates Fall, But Beware the ‘Mod’

To hear Frank Pennachio tell it, there’s danger even in good news.

Pennachio is a cofounder of the Institute of WorkComp Professionals, a group that certifies insurance professionals who deal with the workers’ compensation insurance system.

The good news? Powered by both state insurance reform and better workplace safety, workers’ comp rates have trended downward in recent years. Where’s the danger in that?

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It’s a fact: You can’t control your workers’ comp costs unless you also control open claims. Learn how in BLR’s special April 10 audio conference on the subject. Can’t attend? Preorder the CD. Click for info.

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“Declining rates act as blinders for many employers,” writes Pennachio on the website, insurancenewsnet.com. “With lower prices, it’s easy to shift focus away from injury management and cost-containment to other, more pressing business.”

Instead, he advises keeping focus on rates and the forces that drive them separately. That’s because although state government is one driving force, setting the basic rate for any class of business, there’s also a second—even more powerful—force.

It comes from the fact that each insured business also gets its own experience modification rating (“mod”)—a discount from, or a premium added to, the rate an average business of that class would get.

The mod is based on the cost record of the individual business and is, therefore, completely under the control of that business’s management. Because overall rates move in a cycle, a modifier, says Pennachio, will act as an accelerant on rising rates, possibly creating a dramatic rise.

What should businesses do to keep this from happening? Pennachio has several suggestions:

First and foremost, he advises management to see the true cost of workplace accidents, which goes far beyond workers’ comp rates, by including such factors as lessened productivity, overtime, and decreased customer service and satisfaction. Looking at total costs will encourage senior management to take a harder look at the issue.

And because so much is riding on improving safety, he further advises not seeing workers’ comp as a commodity to be bought from the lowest bidder. Instead, he suggests a relationship with a stable company and experienced agents who know the field and who can suggest ways to improve that all-important modifier rating, which, “unlike declining rates, [is] a guaranteed way to drive down costs over the long term.”

Misclassification

Another expert who has weighed in on improving the modifier is Marc Weider, a CPA with Anchin, Block & Anchin LLP. Writing in Real Estate Weekly, he suggests a professional audit of factors going into the mod, starting with the classification of individual employees.

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“Often your insurer may send an auditor who spends only about an hour determining how to categorize the various jobs,” he notes. “You may be able to lower your premium by hiring an independent auditor. The clerical person who manages your truck repair schedule should not be in the same category as a roofer just because both work for your company.”

Weider also suggests:

Be aware that a history of small, recurring claims can have a greater impact than one large one, as this signifies insurers that a continuing problem exists at your site. Therefore pay special attention to repeat accidents.

Look into state-run safety programs, such as a drug-free workplace program, that may carry workers’ comp rate discounts.

Look into state-authorized industry groups that pool their risks and thus achieve lower rates for all the members.

“Substantial savings,” says Weider, “are possible for those who make a concerted effort to analyze their coverage and monitor their costs.”

In tomorrow’s Advisor: More tips to cut your workers’ comp expense, from insurers themselves, and also, how to spot a fraudulent claim.