A few years ago, I was asked by Assurance Agency to write an article for their customers that would provide tips for controlling workers’ compensation insurance costs. Assurance Agency is located in the Chicago area and provides support to staffing companies throughout the Midwest.

The tips that I provided even though directed to staffing companies, apply to all companies that purchased fully guaranteed plans or retrospective rating plans. Following is the article. I trust that you will find something of value in it.

Given the fact that workers’ compensation insurance premiums typically represent the second highest cost for a staffing company (payroll being the highest), it is an obvious area for companies interested in improving profitability to explore. Since our company consults in this area, I can assure you that most workers’ compensation premiums can be reduced due to experience modification factors that are higher than they could be or by correcting misapplication of the experience modification factors.

Much of our audit is complex and time consuming. However, there are a couple of activities that can be completed without our involvement – in most cases.

Tip 1 – A staffing company, by its very nature, has complex payroll issues. Therefore, it is very important to assure that payroll used on the final premium audit is correct. This is many times a grey area and mistakes are common.

Your insurance carrier’s payroll auditors should not be expected to know your business or job classifications as well as you do. Never forget that the auditors are working for the insurance carrier and can be expected to look after their employer’s best interest. It is therefore imperative that a staffing company review the classifications and associated payrolls to assure that they are correct.

Tip 2 – In addition to classification errors, other errors frequently occur on final premium audits. For example, workers’ compensation rates are based on 100 hours of payroll. However, if overtime is paid at 1.5 times the normal hourly rate, the amount of overtime payroll must be discounted by 1/3. The reason is that the regular time rate – not the overtime rate – is to be used in determining manual premium.

Tip 3 – Auditing the experience modification factor can also identify excessive premiums. It is our experience that experience modification factors are typically not as low as they could be. In fact, when analyzing our clients, we find that across the board we recovered money for more than 50% of our accounts. We recover 86% of the time when the client has more than $100,000 expected losses in the latest reported year and 2 of its last 3 modification factors above 1.0.

Your experience modification factor is a multiplier. Therefore, should it be overstated, it will result in excessive premiums. For example; if your modification factor is 1.0 and it could be .90, your modified premium will be 10% higher than it would be if the correct mod were applied.

It is my strong belief that only a small percentage of the money that could be recovered from workers’ compensation insurance premiums will ever be identified. I believe this for two reasons. First, the complexity of the data collection process and the number of activities that go into determining the experience modification factors result in a high probability of error. Second, we’ve been auditing insurance premiums for nearly 9 years, have over 1600 clients, have audited thousands of worker’s compensation premiums and experience modification factors – our experience proves it. Even so, most companies like to think that the system works in their case and that their modification factors are correct – and they don’t have their experience modification factor audited.

It would be an understatement to say that the calculation of the experience modification factor is complex. There are weighting values, stabilizing values, expected loss rates, D ratios, ballast factors, expected losses, excess expected losses, and up to 45 months of claims experience included in the calculation of your experience modification factor. In addition, there is a myriad of State specific exceptions to the national rules. It should come as no surprise that in most cases, the experience modification factor is not as low as it could be.

Please feel free to contact us with any questions or concerns you may have at or toll free at 800-758-2941.

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