Thursday, July 17, 2008

The Basics of Experience Rating Part 1 (NCCI)

What drives costs up the most? For a basic primer on experience rating, we recommend going to the source: The National Council on Compensation Insurance website provides a well-written document (PDF) that will walk you through the fundamentals of experience rating.

When we train employers on experience rating, we focus on employer strategies: what can you do to minimize the future cost of insurance? How can you translate a basic understanding of experience rating into a reduction in future premiums? Keep in mind that in experience rating, size matters. Large insureds with large premiums are expected to have more losses than smaller insureds. Indeed, because their margin of error is smaller, companies with premiums in the $10,000 to $50,000 range can easily find themselves in a lot of trouble with just a few injuries.
The Rating Period In workers compensation, your past history follows you along like a faithful dog. In fact, losses that occurred 5 years ago still impact what you are paying today for insurance. The rating period for your 2005 policy (the policy which begins any time during the 2005 calendar year) includes all the losses from 2001, 2002 and 2003. On the other hand, losses prior to 2001 are gone forever: they cannot impact your experience rating, even if the reserves are increased substantially.

Primary Losses Are the Most Expensive. Every time you report a claim to your insurance company, a reserve is set for the claim. The reserve projects the total indemnity payments (lost wages), medical bills and expenses for this particular claim. The first $5,000 of each claim is considered primary. Any amount of reserve above $5,000 is considered excess loss. Any reserves above a state-specific ceiling (ranging from $100,000 in most states to as high as $175,000 in Massachusetts) is unratable that is, it does not count at all in the calculation of your experience rating.

So what does this mean? Experience rating places more emphasis on the frequency of injuries than on the severity. An employer with one large loss ($100,000) will pay less for future insurance than an employer with 10 smaller lost time claims of $5,000 each with a total of $50,000 in losses -- because the full $50,000 is primary loss in the premium calculation for the second employer, while there is only $5,000 in primary losses for the first employer. Experience rating cushions the blow of the large loss, but hammers employers with frequent losses.
Small Employer, Big Trouble: Here is where a lot of smaller employers get caught: if you have a frequency problem (a lot of relatively small injuries involving at least some lost time) and just one big loss, the primary losses add up in a hurry. You quickly exceed the expected level of primary losses. As a result, your experience rating pushes up into the debit zone. You start paying a lot more for insurance.

If you find yourself in this position, with an experience modification well above 1.0, you need to learn more about the intricacies of the rating process itself. There are opportunities for minimizing the impact of your losses. NOTE: States vary in their application of experience rating procedures. Check with your local authority if you have specific questions.





Published by Lynch Ryan - Workers Comp Insider

Monday, July 14, 2008

Which State does the Work Comp Payroll fall Under

I recently had a contractor (OKLA client) hire a TN subcontractor to do some painting work in MO. They let them start the job without WC insurance and the sub never obtained the insurance. The question was what rate will apply at audit for our client since each state has different rates. After emailing the underwriter we received this answer from their audit department:

The WC Rules (as found in the Scopes under 5403) are:
1. the payroll of employees who are hired for a specific job project are assigned to the state in which the job is located.
2. payroll of employees who travel constantly across state lines but return home each night are assigned to their headquarters state
3. if employees are assigned to a job that is located in a state other than their headquarters' state, their payroll shall be assigned to the highest rated of either the state in which the job is located or the headquarters' state.

For Gen. Liability, they are assigned based on the location of the job

Since these multi-state issues do come up from time to time it is good to have a good insurance company that deals in multi-state exposures to help out on these situations.

Chris Moxley

Compsource official attributes losses to strength of private insurers

July 1, 2008
OKLAHOMA CITY – Terry McCullar seems unperturbed to report to the board yet another month of policy losses for CompSource Oklahoma. The state-created workers’ compensation insurer has been losing ground in its net number of policies at a steady clip since 2006.
But McCullar is familiar with the ups and downs of the workers’ compensation market in Oklahoma, and doesn’t seem to regret the loss in market share. McCullar notes the data suggests CompSource’s lost policies are an indication of the strength of the private insurance market at the moment. But the data also indicates that hard times for the market may be on the horizon, as private insurers increasingly become the victims of their own success.
“It’s starting to show up in combined ratios,” said McCullar. “They’re beginning to decline, which may be the first indication that the less competitive companies are pricing themselves out of the market.” An insurance company’s combined ratio is the sum of its loss ratio and expense ratio; a combined ratio over 100 generally indicates unprofitable underwriting.
“Softening prices are pushing written premium growth in workers’ compensation into negative territory, jeopardizing longer-term profitability,” Conning Research & Consulting reported in its midyear update. The average 3-percent decrease in written premiums experienced nationwide could in part be attributable to competitive pricing, as insurance companies fight for a greater share of the market. But when coupled with increasing medical costs and the threat of a sustained economic recession, low premiums could signal a profitability problem for the private market in the near future.
“Keeping the combined ratio at or below 100 percent will be both a test of insurers’ resolve in providing a stable market to the customer, and their ability to manage enterprise risk effectively,” Conning reported.
Private insurers may increasingly find themselves between a rock and a hard place as they balance the need to keep written premiums low with continued increases in medical costs. Workers’ comp reforms in several states have shown success in reducing the number of claims filed, but the cost of the average claim has grown enough to significantly erode the benefits of lowered frequency. And as the average age of the American worker continues to increase, insurers can expect to see greater severity in bodily injuries, Conning reported.
According to the latest NCCI report, frequency of claims per 100 workers has declined from 1.7 to 1.1 between 1997 and 2006, but the annual increase in medical care costs per claim averages 8.5 percent over the last five years. Medical care costs are growing faster than the overall Consumer Price Index medical care costs, NCCI reports, accounting for 59 percent of total claim costs in 2007.
Demand for insurance coverage declines during times of economic recession, as employers try to cut costs. At the same time, studies show more workers are likely to file claims during times of economic hardship. Employers may also cut spending on safety-related budget items, contributing to a rise in claims.
States that have in recent years made significant workers’ comp reforms may be unwilling to provide further benefits for insurers if it comes to light that some of their problems with profitability are “’self-inflicted’ by aggressive price cuts,” Conning reported.
The effect in Oklahoma may prove different for Oklahoma than for other states. The fact that premiums for CompSource have held relatively steady for the last few years despite a reduction in the number of policies may indicate that Oklahoma has bucked the nationwide trend in that wages have increased during that time, said McCullar.
The leading private insurer in Oklahoma, AIG, holds 15 percent of the market share. But AIG’s spokesman in New York remained tight-lipped about the company’s experience.
“We very rarely comment on claims experience,” said Joe Norton, director of public relations for AIG. “It’s not something I can help you with.”
Nationwide, the average combined ratio for private insurers rose from 93 in 2006 to 99 in 2007. CompSource reported a combined ratio of 111 for 2007, in range with other state-created insurers, which reported combined ratios between 106 and 115. CompSource was the leader in market share in Oklahoma during 2007, at 37.8 percent. During the last hard market cycle, in 2005, CompSource’s market share peaked at 46.9 percent.
Copyright © 2008 The Journal Record All Rights Reserved 101 N. Robinson Ave., Ste. 101, Oklahoma City, OK, 73102

Plastic Packaging Injuries

While opening my new blue tooth headset today, I started wondering how many people had been injured opening these bulletproof plastic packages. I had to get wire cutters to open the packaging and almost sliced open my arm in the process. I looked it up and the Consumer Products Safety Commission reported that injuries from plastic packaging resulted in 6,400 emergency room visits in 2004 alone. I'm sure this has gone up from 2004. These people need to seriously consider getting rid of this ridiculous plastic packaging.

Oklahoma Workers Comp Death Benefit Chart

Newest Oklahoma Workers Comp Death Benefit Charts. http://www.owcc.state.ok.us/Death%20Charts/Death%20Chart%20-%20Nov%201,%2005%20to%20Oct%2031,%2008%20-%20Rev.%2009-05%20from%20Tish.pdf

OKLA Workers Comp Fee Schedule 1/1/08

Oklahoma Medical Fee & Hospital Schedule Changes Effective 1/1/08 http://www.owcc.state.ok.us/MedServices/2008%20Fee%20Schedule_FINAL%20updated%203-10-08.pdf