WORK COMP POWER TOOL: DATA ANALYTICS
Colorado brokerage forms unit aimed at reducing employers’ comp costs
By Elisabeth Boone, CPCU
Knowledge, it’s said, is power, and in the workers compensation line, knowledge is gained to a great extent by understanding the numbers. To control and reduce costs, insurers, producers, and employers need to grasp the significance not only of numbers like losses, claims, and premiums but also the all-important experience modification factor, informally known as the e-mod.
At CCIG in Greenwood Village, Colorado, helping clients achieve a lower e-mod is serious business—so much that the brokerage—the Rough Notes Agency of the Month for June 2017—has established a subsidiary to do just that. Called Workers’ Compensation Advanced Analytics, the unit is headed by veteran workers comp statistician Bill Young, who has nearly 30 years of experience analyzing insurance data. He worked for CCIG’s workers compensation division as an independent contractor for several years and was brought on board to launch the new unit. The unit performs data analysis services for CCIG and selected other agencies.
“Workers comp is a highly predictable line of coverage, and by using data analytics we can show our clients how they can lower their e-mod and enjoy substantial savings,” Young asserts. “Software that performs analytics is commercially available, but I work from an Excel spreadsheet that I built from scratch. This enables CCIG to produce customized analytics whenever the need arises.”
Analyzing years of workers comp data requires a healthy dose of brain power as well as intense concentration, both of which Young possesses in abundance. Perhaps not surprisingly, he’s passionate about his job and loves to share his findings with clients.
“With a higher deductible, policyholders look closely at claims and ask themselves if they could have done something to prevent the loss.”
CCIG Workers’ Compensation Advanced Analytics
“It’s a lot of fun to work with clients who have never seen this kind of analysis before,” he remarks. “Their eyes open wide and their jaws drop when they realize that they can save 15% to 40% on their premium simply by choosing a higher deductible. It’s absolutely life altering, especially for nonprofit entities, for which every dollar saved is another dollar that can be used to support their cause.”
Nuts and bolts
The data analytics program Young created is highly complex and sophisticated and, therefore, won’t be detailed here. He explains the steps in the process by which he calculates a client’s e-mod based on its loss history, deductible, and other factors.
“I first gather four to five years of loss history and payroll history by class of worker,” he says. “I then use tables provided by the National Council on Compensation Insurance (NCCI), which develops experience modifiers. Using that data, I run lots of different what-if scenarios. For example, if the client had selected a particular deductible in the past, what would its e-mod look like today, and how would that affect the premium? I show the client how choosing a higher deductible would improve its cash flow.
“Clients often balk at the idea of increasing their deductible,” Young observes. “What they may not realize is that if their deductible goes up, their deductible discount also increases.”
He offers an example. “Earlier this year I worked with a small mom-and-pop company that had an e-mod of 2.17 because of an accident in which many employees were injured. The way the carrier reported the data to NCCI was wrong, and when I found the error and had the carrier correct the reporting, their mod went down to 1.88. That’s still high, but that alone saved them $20,000 in premium, and they’ll see that same savings for each of the three years in which that data will be in their mod.”
For any agency or brokerage, a key goal is to retain clients. CCIG’s use of data analytics, Young points out, is a powerful tool for retention. “Clients will stay with an agency when they realize that it is acting in their best interests.”
Young also acknowledges the role of safety programs in controlling comp costs. “The cheapest accident you’re ever going to have is the one that doesn’t happen,” he declares. “When you show insureds that every $1 in claims will raise their premium by $2.50, they start to take loss control very seriously. All of a sudden that safety guy is not an overhead expense, nor is the money spent on training. These resources really do contribute to savings by having claims not happen.
“Add to that the fact that when policyholders select a higher deductible, they start to watch claims and pay attention to their causes,” Young remarks. “In the past when they had a low deductible or no deductible and a claim occurred, they just passed it off to the insurer and let them deal with it. With a higher deductible, policyholders look closely at claims and ask themselves if they could have done something to prevent the loss. With a $10,000 deductible, the insured will be on the hook for significant costs associated with that claim.”
Eyes wide open
As noted earlier, clients of CCIG tend to become wide eyed when Young details the advantages of moving to a higher deductible on their workers comp coverage.
“I generally see two kinds of reactions when I show them my analysis,” he says. “If it’s a prospect we’re pursuing, he or she is frustrated at not having been given this information years earlier. If they elect a higher deductible today, it will be two years before the change is reflected in their experience mod. For example, if the client chooses a $10,000 deductible on its September 1, 2018, policy, it won’t be reflected in the e-mod until September 1, 2020.”
The other reaction, Young continues, is that “the client or prospect is uncomfortable with the idea of going to a higher deductible. Sometimes we’ll hear a client protest: ‘We can’t afford this!’ I respond by suggesting that they put their toe in the water first. They don’t have to choose a $10,000 deductible; they can start by raising the deductible modestly. Once they get comfortable with it, they usually end up raising their deductible over time.”
Currently only a handful of agencies and brokerages are using data analytics to help their clients control workers compensation costs. As awareness of the concept expands, more and more firms likely will begin to employ this cost-saving power tool.
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