Worker’s compensation insurance (“work comp”) is an expense that every business owner dreads. The state forces you to purchase it, rates and premiums are seemingly out of your control, and the extent to which the insurance will be needed is a complete guess.
To make matters worse, the mathematical rules that dictate work comp rates and premiums are incredibly complicated. Most business lines insurance brokers don’t even really understand all the ins and outs. And the worst part about it? The higher your rates and premiums are, the bigger your broker's commission check is. It doesn't take much to realize that this is a conflicting arrangement.
Yet, there are some things you can do to educate yourself, lower your rates, keep your broker honest, and save yourself a lot of money.
1. Get a Handle on Your Open Claims
All insurance carriers reserve an amount against the policy for open claims. It's something that most business owners never see, discuss with their broker, or even know exist. These open claims can have a substantial impact on your rates and premiums.
It's quite common for insurance companies or administrators to make mistakes with the amount of reserves against open claims. You have to be proactive in requesting your open claims detail, and pushing your broker to work with you in lowering the reserves and continually working these claims toward closure. Doing so could reduce your costs dramatically.
2. Understand Your Mod
Understanding your Experience Modification Rating ("mod"), and the factors that cause it to change, is tremendously important. Yet most business owners don't take the time to figure out the basics for themselves. Your mod is the number that compares the risk of your business against other similar businesses. If your business is assessed to be a higher risk than others, your mod will be some number over 1.0. Conversely, a mod of less than 1.0 indicates that you are generally considered less risky. The lower your mod, the lower your premium.
The mod formula uses payroll data and data from your historical losses (from claims/incidents/losses) to arrive at the final mod, and every year you get a new opportunity to improve it. The "Worker's Compensation Experience Rating" worksheet contains all of the data for your specific policy. Simply understanding this form will give you insight into the kinds of decisions you could be making to reduce your mod over time.
For example, you'll see that the "expected loss ratio" for each employee classification code is different. Thus, making sure your employees are classified in the most advantageous manner can obviously save you substantially. The section of the worksheet that contains actual claim and loss data provides further opportunity for savings. Again, working these claims to closure and ensuring that the losses and injury types are recorded accurately can have a huge impact.
3. Report Incidents Immediately and Handle Claims Proactively
Pretty much any broker will give you this advice, but it's true and can save you a lot of money. Most business owners try to hide incidents from their insurance company. This is the wrong way to go about things. Waiting it out as long as possible, hoping that things will work out and you won't have a claim on your hands is absolutely the wrong approach. You should contact your insurance company and report the incident almost as soon as you become aware of it. This way you have the best chance of minimizing the potential damage from the outset.
But what if your employee says they're not hurt? If this is the case, ask them to sign something saying they’re not hurt. Do this after every incident in which an employee claims that they are not injured. By doing so, you greatly reduce the chances that they could use the incident down the road in filing a claim.
In the event that they are actually injured in a serious way, the last thing you want to do is avoid the situation and try to distance yourself from it. As the business owner, you want to be "front and center" in showing the company's support for your employee. Visit them at the hospital. Send flowers. Do the things that will make it clear that you are on their side. Employees almost always feel like it's them against the company. But if you are right there with them and showing strong support, they might think twice about playing hardball with you or your carrier.
With just a little extra homework and a more proactive mindset, you'll be well on your way to reducing your work comp insurance expenses.
Josh Turner is the founder of Gateway CFO Solutions, a St. Louis based consulting and media firm specializing in helping small business owners reach their profit potential. Josh has served as Chief Financial Officer for companies in a variety of industries, from startups to mature, stable businesses. Read more about Josh here.
