Errors in premium audits often lead to overcharges
By Frank Pennachio
Overcharges occur in two key areas--the premium audit and the experience modification factor.
Insurance agents across the country today are facing many uncomfortable meetings with clients because of skyrocketing workers compensation costs. They often are bringing a message of double-digit, if not triple-digit, rate increases. Ironically, many employers are already being overcharged. Agents can play a role in helping their clients prevent future overcharges and perhaps even recoup past overcharges.
"There are several practical and proven strategies to prevent workers comp overcharges," says Preston Diamond, director of The Institute of WorkComp Advisors. "It is simply a matter of knowing where to look, knowing the rules, and implementing processes that eliminate the possibility of an employer being overcharged."
Overcharges occur in two key areas--the premium audit and the experience modification factor.
How many employers have a system in place to ensure that no errors are made on their premium audit? Because of the way the premium audit process is structured, virtually all errors default to the benefit of the insurance company. If an error occurs, it is almost certain that the employer will get overcharged.
Does this sound familiar? The premium auditor arrives at the client's office and is shuffled off to someone in the office who then deals with the auditor. The assigned person usually has no idea about the rules of the game or how to present important and accurate information to the auditor.
For example, does this person know:
* The job duties of all current employees?
* Those employees who worked during the policy period but are no longer employed?
* The variations of certain classification rules?
* The kinds of remuneration on which the employer doesn't have to pay workers compensation premium?
* Who all the corporate officers are?
* How to handle both insured and uninsured subcontractors?
Such knowledge is not likely without prior training and a clearly defined process. As a result, the employer may get overcharged on the premium audit. And that overcharge isn't just for this year, but each and every subsequent year. Overcharges may amount to many thousands of dollars. We know of a "mom and pop" contractor being overcharged $1,000 annually for 20 years.
Insurance companies don't intend to overcharge their customers on the premium audit. They just have a need to complete the audit in a quick and efficient manner. It is not the auditor's role to educate the employer on all of the rules. As a result unintended overcharges are just part of the way things work in workers compensation.
Thomas Wobbe of Langan Insurance, Louisville, Kentucky, reports: "The insurance company's auditor changed the experience mod at audit. This resulted in an $8,000 audit premium. I forwarded the underwriter the NCCI info prohibiting such a move. Within literally 10 minutes they waived the premium due and issued a flat audit premium."
The second most common cause of overcharges following the premium audit is the calculation and management of the experience modification factor. It is perhaps the most misunderstood component of the workers compensation policy. Unfortunately, most insurance buyers--and many insurance agents--do not thoroughly understand how the experience rating process works. To effectively control insurance costs, it is very important to closely monitor the development of experience modifiers.
There are two central questions related to the experience modification factor. First, is it correct? Second, could it have been lower had certain strategies been implemented? Many experience modification factors have been calculated incorrectly, but most all have been mismanaged.
Much data, that even Einstein would find troublesome, has to pass through many hands in order to generate an experience modification factor. As a result, errors can and do occur. For this reason, it is critical to have a process in place to verify the accuracy of the experience mod.
When an error is found, it is necessary to have the insurance company resubmit its data to the rating bureau to correct the problem. If the correction generates a premium credit, it is critical to follow the process all the way through to the employer's billing statement. In most states, errors can be corrected not only on the current policy, but also on the two previous policies. An error that occurred on multiple policies can have a huge impact on premium.
What does it mean to have a mismanaged experience mod? There are two critical areas where experience mod mismanagement occurs. First, little or no attention is paid to open claim reserves prior to the time the insurance company reports the data to the rating bureau. Since claim reserve amounts have the same impact on the experience mod as paid claims, an overstated reserve causes an overcharge to the employer. Once the insurance company reports the data to the rating bureau it cannot be changed except under very limited conditions.
Another Institute graduate, Mitch Loewen, Minnesota Insurance Brokers in West St. Paul, noted that the first experience mod he examined had a $35,000 open claim reserve on the mod for three years. Nothing had ever been paid out on the claim. It should have been closed with no impact on the mod. However, due to the oversight, this claim reserve resulted in an overcharge to the employer in excess of $40,000 over the three-year period.
Is there a process in place to monitor claim reserves? What strategies can be utilized to negotiate appropriate reductions in reserves? Can you measure the impact of claim reserves on the experience mod? If you don't have procedures in place to address these issues, it is likely the employer is being overcharged.
The other experience mod management issue is related to the experience rating adjustment plan (ERA). Although ERA is not approved in all states, it has a major impact on experience rating in those states using the plan. Is your state utilizing the ERA? If so, what strategies have employers implemented to gain from the benefits provided by the ERA?
There is another extraordinary service associated with the experience mod that agents can provide their clients. By utilizing a software package called ModMaster 2000, created and distributed by Specific Software Solutions, agents can provide insight and analysis of the experience mod.
The reports generated by this software provide answers to many questions such as: Why did my experience mod go up? What is the lowest my experience mod could have been? What was the experience mod point impact of each claim? Through the use of this kind of analysis you can illustrate to the employer how he or she, not the insurance company, pays for most of the claims through the impact of those claims on the experience mod.
Once the employer understands that its insurance company does not pay for most of the claims but just finances them, employers should understand that processes must be in place to manage an injury. Though it is their money being spent, most employers just fax or call in an injury report to an insurance company and leave it up to the insurance company to handle the claim. The employer needs a clearly defined process to follow when an injury occurs.
Shawn Cummings, Greenpoint Insurance, Greensboro, North Carolina, relates this incident: "My client sat straight up in his chair when he really understood he, not the insurance company, paid claims for injured employees. He was now ready to become actively involved and put into action and monitor a claims process that kept more of his money in his jeans."
Workers compensation claims adjusters probably have the most difficult job in the insurance industry. They are overwhelmed with work and with communications from the employee, doctors, lawyers, employers, family members, clinics and other parties in the system. In today's cost-cutting environment, they are trying to do more with less. It does not make sense to leave the task of claims management exclusively to the adjuster.
The employer's managers and supervisors must be more actively involved, implementing a process to get the employee the best medical treatment and back on the job quickly. This is an essential step toward reducing workers comp costs. Every dollar spent or reserved has a direct impact on the employer's premium.
Most employees and doctors are willing to cooperate with the goals of the employer. What is lacking is a coordinated process that involves the doctor, the employer, the adjuster, and the employee. In addition, through this process, the employer and agent will be better able to negotiate claim reserves with the adjuster. Clinic and doctor relationships, a comprehensive return-to-work program, and supervisor training are powerful tools to eliminate overcharges and reduce costs. It seems that this blinding glimpse of the obvious is missed by too many employers, or given lip service at the best.
As Chris McVicker, president and CEO of The Flanders Group, Pittsford, New York, states, "Since more than 65% of our business is providing workers compensation, we focus on understanding the intricacies of each account's effect on our industry-specific safety group's experience and assisting them in quantifying the value of a safety culture.
"Our obligation is to work with employers to return their employees back to work, to make the employees feel important to the continuity of operations, and guide the adjustors to ensure all aspects of each claim are investigated," McVicker continues.
"We talk with employers about HR practices and how workers compensation is greatly impacted by hiring practices.
"We find a very select number of agents nationwide who take the all encompassing approach the Institute teaches," he says.
Of course, the best injury is the one that never happens. Preventing costly claims from getting into the system can be one of the best tools to eliminate overcharges. A claim that never happens eliminates the possibility of excessive medical or indemnity dollars being spent and cannot have an overstated reserve reported to the rating bureau.
Agents and insurance companies have almost exclusively focused on safety programs as the way to prevent injuries. Studies are showing that safety programs are a necessary but far from a sufficient way to reduce costs. Incident rates are coming down, but overall claim costs are going up.
Ask employers about a claim problem and they will rarely say that it was a safety failure that caused the problem. Instead you'll hear claim problems are more commonly people problems. People cause claims, not machines.
Ask employers if after a claim they have ever muttered to themselves, "I should never have hired that so-and-so anyway." How many employers hire claims? How many understand that? If claims are hired, what is our job in loss prevention and risk management?
Workers comp is a complicated process that works for you and your clients only if you have a well-defined process in place and follow it in order step-by-step. That's the way to keep your clients and to capture new ones.
As Bob Phelan of The Litchfield Agency, Torrington, Connecticut, says, "One of my producers is prospecting exclusively with the CWCA [The Institute's Certified WorkComp Advisor designation] approach. He has been in the business only 18 months, has written four accounts by broker-of-record totaling over $500,000 in premium and has three $500,000 accounts in the pipeline right now. Having the CWCA process and knowledge is giving us a huge competitive advantage."
What you don't want is to be the culprit and have your clients overcharged. What you do want is to implement a process that will help you keep your workers comp clients forever. *
The author
Frank Pennachio is with The Institute of WorkComp Advisors. Since October 2001, The Institute of WorkComp Advisors has conducted a monthly, two-day immersion institute on how to sell and service work comp to employers with between 20-300 employees. Attendees must pass an intensive exam to earn the Certified WorkComp Advisor (CWCA) Designation. The designation is limited to a specific number of agency producers per geographic area.
For more information:
The Institute of WorkComp Advisors
Phone: (919) 929-8483
Web site: www.workcompadvisors.com/workshop
Email: pdiamond@workcompadvisors.com