Workers Compensation. Are Costs Controllable?

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Workers Compensation

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Your WC Risk Costs

•  Has your WC premium gone down in recent years? •  Has your WC premium stayed the same?

•  Has your WC premium gone up in recent years? •  Are you paying $1 for something worth 30 cents? •  Advisory WC rates in IL are down since 2011

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Illinois WC

•  $2.6 Billion in 2012 IL WC Premium < than 2007 •  IL WC rates average <3% of Payroll

•  Average 3% - 4% of employees injured per year

•  Has been one of the higher loss ratio WC States •  Overall Combined Ratio of 120% from 2008-2010 •  Combined Ratio Improvement: 108% - 2011 & 99.5% - 2012

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Illinois WC

•  Changes in law estimated to reduce loss costs

•  Assigned Risk Pool has grown to over $100 M •  Higher litigation of WC claims than most states •  200,000 – 250,000 total workers claims per year •  65,000 – 80,000 injuries over 3 lost workdays

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Illinois WC Recent Changes

•  No WC benefits if employee intoxication proximate cause of injury – Effective in 2013

•  Rules for drug testing added in 2013 (DOT)

•  Reason for post accident drug testing

•  Medical Fee Schedule updated to discount medical costs of claims.

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Workers Compensation

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History & Purpose of WC

Workers compensation laws first came to states in the US in 1911 as a improved way to deal with work-related injuries and illnesses.

•  Workers’ Comp benefits are the sole-remedy for work-related injuries and illnesses.

•  It provides medical care at no cost to the injured employee, & partial replacement wages if the

injured employee is unable to work.

•  In exchange, employers are protected from law suits by injured employees.

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Positives of WC

•  Protects employee from the financial risk of workplace injuries (No Fault)

•  Injured employees cannot sue their own employers (there are rare exceptions). •  Eliminates time & $ consuming liability trials. •  Reduces financial burden on family & public. •  Reduces legal fees and burden on courts. •  Prevents business from being bankrupted. •  Spreads the cost among many employers.

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Negatives of WC

•  Erosion of sole-remedy principles

•  More litigation & arbitrator involvement

•  Has become adversarial and more costly

•  Long tail – many years before all claims closed

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WC Price Calculation

•  Payroll is the basis for pricing WC.

•  Proper Classification (~600 WC class codes) results in the correct unit charge for coverage based on the nature of the work.

•  Proper Allocation results in the correct subtotal charge for each class code.

•  Accuracy is important & payrolls audited •  Manipulating payroll classification and/or

allocation is both illegal and unethical, and may ultimately harm the insured.

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Factors Affecting the Cost of WC

Which of these can the insured control ?

– Economic Conditions

– Returns on Market Investments

– Insurance Industry Changes & Competition – Regulatory Changes

– Medical Cost Proliferation & Inflation

– Cost Shifting from Other Healthcare Systems – Decisions by Judges & Arbitrators

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Critical Success Factors for WC

• Experience Mod Factor • Return to Work

• Rapid Claim Reporting

• Dedicated Adjusters & Rehab Nurses • Communication with Claim Handler

• Injury Management Employer & Insurer • Injured Employee Contact

• Pre-hire Screening

• Substance Abuse Testing • Accident Reporting

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Workers Compensation

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Critical Success Factors for WC

• Effective Safety Program • Safety Coordinator

• Owner/CEO Involvement • Supervisor Involvement • Employee Involvement • Accountability for All • Training

• Safety Inspections • Job Descriptions • Disciplinary Policy • OSHA Compliance

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Workers Compensation

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Advisory Rates

•  Most insurers use NCCI Base WC Rates

•  NCCI / Insurance Department publishes

based on past losses and payroll in Illinois

•  These rates are adjusted by insurance

companies for specific insured risk factors

•  Experience Mod adjusts - loss experience

•  Underwriters can add or subtract 50%+

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Attractive WC Accounts

•  Established businesses with demonstrated success in controlling WC exposures.

•  Formal Stay at Work / Return to Work Program

•  Drug testing programs established (post accident, for cause, post offer, DOT random, etc.).

•  Business risks with appropriate WC controls in place (hazard assessment, JSA, etc.).

•  Employers who capitalize on their opportunity to prevent and manage injuries.

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Deductibles

•  Illinois allows ‘small’ deductibles of up to $1,000 per medical-only claim (6% to 2% discount).

•  Illinois allows large deductibles with $250,000 of each claim being more common.

•  70% discount of medical claims <$5,000. Added to EMF calculation to discourage small claims not being reported. All WC claims are to be reported.

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Claim Reporting

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Timely Reporting of Claims

The benefits of timely reporting are many, and include:

•  Early intervention through the adjuster.

•  Rapid triage to an appropriate medical provider. •  Investigation while the claim is fresh and details

are readily available.

•  Better quality and more timely medical treatment. •  Utilization of cost containment tools from the start. •  Increased satisfaction of the injured employee.

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Top Reasons for Reporting Delays

#1: Self-Treatment – the employee believes the

pain will go away on its own or with self-care.

#2: Lack of Employee Training – the employee

doesn’t know the correct procedures to follow when an injury occurs.

#3: Perceived Negative Consequences – the

employee believes, right or wrong, that reporting will bring negative consequences, such as

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Early Reporting of Claims

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 1 week 2 weeks 3-4 weeks 4 weeks or longer 10% 18% 29% 45%

Reporting Delay (Lag Time) vs Average Increase in Claim Cost

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Experience Modification

Factor

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Experience Modification Factor

(EMF)

•  a.k.a. Experience Modification Rating or EMR. •  The EMF is a statistical tool used to quantify and

represent losses for a business over a 3 year period of time.

•  The formula includes data on actual and

expected losses, and multipliers to account for data credibility and centering the results around 1.00 as average.

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Experience Rated vs Merit Rated

Experience Rated – must meet minimum premium

and business history requirements, $5,000/year in premium in Illinois, and at least 2 years of WC

experience.

Merit Rated – Used for smaller insureds that can not

qualify for experience rating. Typically, employers with no lost time claims over the two year period will

qualify for a small discount from the manual rate. Those with one lost time claim will receive no

discount, an those with two or more lost time claims will have a surcharge.

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EMF – The Insured’s Bottom Line

Things you should know:

•  Many factors affect the cost of WC insurance.

•  Insureds pay for their loss experience via the EMF. •  The EMF is major factor the insured can control. •  Insureds can control their EMF via best practices. •  With this understanding there are reasons to utilize

best practices for WC. •  Prevention

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Minimum EMF is the Goal

Current EMF: Based on 3 years prior to expiring year. Minimum EMF: The EMF with zero losses.

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Controllable EMF = $avings

Example

Current EMF

- Minimum EMF

= Controllable EMF

1.27 $127,000 0.82 $ 82,000 0.45 $ 45,000

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EMF Formula Terms (NCCI)

•  (A) Weight

•  (C) Expected Excess Losses [D-E] •  (D) Expected Losses

•  (E) Expected Primary Losses •  (F) Actual Excess Losses [H-I] •  (G) Ballast

•  (H) Actual Incurred Losses •  (I) Actual Primary Losses •  (J) Total of Actual

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EMF Formula (NCCI)

(I) + [C x (1 - A) + G] + (A x F) = (J) (E) + [C x (1 - A) + G] + (A x C) = (K)

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MI EMF Formula Terms

•  (A) Actual Incurred Losses •  (B) Primary Actual Losses

•  (C) Actual Excess Losses [A-B] •  (D) Expected Losses

•  (E) Primary Expected Losses •  (F) Expected Excess Losses [D-E] •  (G) Total of Actual

•  (H) Total of Expected •  (W) Weighting

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Premium Credits

Premium Credits are discounts. Premium Discount

Schedule Credits

Pricing flexibility by underwriter of +/- 25%, 50%, or more of filed base rates in most states.

Other Credits

•  Large Premium accounts

•  70% Medical only discount in Mod •  Contractors Credit

•  Safety Programs & Safety Committees •  Drug-Free Workplace

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The Split Point Change

The Split Point is the threshold between Primary Losses and Excess Losses. Was $5,000 for years.

•  Primary Losses = the first $10,000 incurred/claim. •  Excess Losses = incurred amount over $10,000/

claim.

•  The Split Point will increase as of each state’s annual rating anniversary (dates vary):

–  to $10,000 in 2013 (some states are still at $5,000) –  to $13,500 in 2014

–  to at least $15,000 in 2015 (likely closer to $17,000)

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Assigned Risk Pool

•  Covers businesses that can’t obtain WC

insurance from any of 300 competing

carriers. Overall pool loss paid by carriers.

•  Rates average 30% to 70% more than

advisory rates in Illinois.

•  ARAP factor is extra charge for poor loss

experience.

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Your WC Cost Controls

•  Prevent workplace injuries – Safety Culture •  Quality employee hiring and selection

•  Managing WC claims – Work with Insurer •  Timely Reporting of Claims

•  Formalized Return to Work Program

•  Experience Mod reflect your WC loss history •  Shared risk: deductibles or loss sensitive

programs

•  Make your business attractive to WC carriers to increase credit pricing

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Summary

Q & A

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References