Safety = Savings: Workers Comp

Recently, I was asked to provide information on ways to Save Money on Worker’s Compensation

premiums… This is a commonly asked question and for good reason, Workers Comp can be a significant expense for any (try every) company’s budget.

Keep a Safe Work Environment!

In this particular case, however, I didn’t want to just rattle off the standard list of Accounting and Planning tips which can save dollars.  Instead I tried to explain the two true driving forces behind Workers Comp premiums and how to make a measurable impact.

Unfortunately, a safe work environment and an organizational culture of safety are the most straight-forward ways to minimize Workers Compensation expense. This is not the answer that Management at most businesses wants to hear because making these types of changes take dollars and time.  But when it comes to Workers Compensation premiums it is all about the Experience Modifier or Exp Mod and the Carrier’s Loss Cost Multiplier or LCM (In competitive states).

Safety = Savings

The Exp Mod in basic terms is an Organization, actual loss data compared against the expected loss for an organization of similar operations, size and classifications.  The Exp Mod places the onus of safety on the Organization by providing an incentive for safe work environments.

In general, Insurance Carriers will look at the preceding 3-year period of losses.  Let’s say a large professional services office is paying $30,000 in Worker’s Comp.  If that Firm has fewer losses during the preceding period than would be expected for a similar firm of that size. A firm that hits right on expectations has a Exp Mod of 1.0, but let’s say this firm has a great loss history and instead has an Exp Mod 0.9.  When this Exp Mod is applied to the $30,000 in premium they were paying, their renewal ends up at $27,000.

This is super-duper simplified, the actual calculation of Exp Mod is much more complex, but the point remains. Well run organizations with a culture of Safety will drastically minimize their premiums.  There is no other single way to drastically reduce the WC burden then through a healthy Exp Mod.

Choose Your Carrier Wisely

In states which allow competitive pricing, (Ohio, Washington, North Dakota, and Wyoming are Monopolistic, meaning Workers Comp may only be bought through the State Fund) it is important to do business with an Insurance Carrier with a favorable Loss Cost Multiplier.

Here is great example that I use to explain this Expense:

Carrier LCM (Carrier Specific, although approved by the State) x Approved Loss Cost Rate (Standard rate set by the State for a specific job class code) = Price Charged Employer

If one insurance company has an LCM of 1.250 and another company has an LCM of 1.667 there will be a difference of 33% between their prices.

For Example say you’re a Salesperson with a loss cost rate of $1.30 times an LCM of 1.250 = a price of $1.63; a loss cost rate of $1.30 times an LCM of 1.667 = a price of $2.17.

Result you pay your sales staff $50,000 a year in wages with:

Carrier #1: ( $50,000 / $100 ) * $1.63 = $815 in Premium

Carrier #2: ( $50,000 / $100 ) * $2.17 = $1,085 in Premium

You Just Wasted $270

The Rub

This is a lot of information to take in so I am more than happy to expand upon any topic.

Disclaimer:

This article is for informational purposely only. There is no legal advice being suggested or proffered and the author assumes no responsibility or liability for the actions take or not taken by the readers based upon such information.

Thank you,

Ryan H.

For more information on increasing your insurance acumen, subscribe to the RSS Feed or my Email Newsletter. Follow me on Twitter, connect to me on LinkedIn, or Like the Albany Insurance Professional on Facebook.

If you would like to discuss receiving a proposal for either your personal or business insurance program email me, or call me at (518) 456-6688.

Read my syndicated post on Health Insurance originally published to Under30CEO.com 4 Pieces of Advice on Health Insurance for Entrepreneurs.

Check out my featured panel discussion in American Agent & Broker Magazine on Millennials in the Insurance Industry : The M factor