by Frank Pennachio, WorkCompEdge Regular Contributor
With few exceptions, workers compensation rates have been declining across the country for several years. Declining rates appear to offer employers relief, especially during these tough economic times. But declining rates can be deceiving and ultimately lead to greater total workers compensation costs. Here are three pitfalls employers should be alert to avoid when workers compensation rates go down.
Pitfall #1 – Assuming that when rates decline, premium costs will decline.
Paradoxically, declining rates may actually drive up the employer’s costs and pose greater risks to their business. Many employers are often surprised to learn that a reduction in rates does not always mean a reduction in direct workers compensation costs.
As regular readers of this blog probably know, rates alone do not determine the premium cost. An experience modification factor (mod) adjusts the cost of insurance to the individual loss performance of an employer. The workers compensation premium is calculated to be:
Rate x $100 Payroll x Experience Modifier = Premium Cost
The calculation of the mod factor itself is somewhat complex, but its overall purpose is to compare an employer with similar employers in the same industry classification. If an employer’s past losses are lower than average, a credit rating reduces the premium. Conversely, if past losses are higher than average, a debit rating can actually increase costs in spite of lower rates.
If an employer’s injury costs increase, then their mod will likely increase and not only nullify the benefit of the lower rates, but actually increase the employer’s costs. In addition, when rates go down, the employer’s injury costs are expected to go down, as well. If an employer’s injury costs stay the same or go up, then it is almost certain the mod will increase even more.
Pitfall #2 – Focusing only on direct costs
Employers tend to focus more attention on injury prevention when workers compensation rates are increasing and less when rates are declining. Yet injury prevention and management is critical regardless of the direction rates are trending. Rates have little to do with ultimate workers compensation costs.
Workers compensation insurance premiums are the direct costs of funding workplace injuries. However, when an injury occurs, the indirect costs can be much greater. These indirect costs include:
- overtime wages
- temporary labor
- increased training
- supervisor time
- production delays
- unhappy customers
- increased stress, and
- property or equipment damage.
While it’s difficult to track some of these costs directly back to a workers compensation claim, they indisputably add to the overall indirect costs. However, employers recognize if they lose a key employee to an injury, then their business will suffer. An employee injury is costly, regardless of the direct insurance costs, and lower premiums have no impact on indirect costs.
Pitfall #3 – Failing to recognize the threat to business
It’s increasingly common for employers bidding on new business to find that their injury record and experience mod are important factors in whether or not they win a contract. This is most prevalent in the construction industry; however, it’s emerging in other industries as well. Suppliers are finding that they are not allowed to deliver goods to a business if their experience mod is above an acceptable number.
If an employer cannot secure new business or loses existing contracts, then lower workers compensation premiums are useless. As stated above, lower premium rates imply an expectation that employers will experience fewer injuries and lower costs. If they do not, then their experience modification goes up. Their increased experience mod may now limit their ability to grow or sustain their business.
As you can see, lower rates can act like a Trojan horse and pose great dangers for the employer. It seems ironic that an employer can be endangered by lower workers compensation premiums, but it is true.