Are you considering a company that has ties to the insurance industry?

Are kick-backs involved? That is, is the consultant paying finder’s fees? Is there some other exchange of dollars between the consultant and the agent/agency? If so, conflicts of interest are likely. In my opinion, if an audit isn’t objective – it isn’t an audit. Are you relying on your agent/agency to assure that your premiums are correct? If so, your premiums are probably not correct. I say this for three reasons.

1. I have yet to meet an agent who is also an auditor.
2. I have yet to meet an agent who is knowledgeable in the rules and regulations throughout the country. If you believe they are knowledgeable, give them the very basic test that is provided in my letter titled “Test Question.”
3. In most cases, the agent is paid a commission. Where is his/her incentive?

Does your auditing firm have expertise outside of the insurance industry?

If not, you are probably not getting an objective audit. When I co-founded Synergetic Solutions in 1996, we employed people who were from the insurance industry. Many were long-time underwriters. They were good honest people but I learned that they were so entrenched in the insurance industry’s way of doing business that they were blind to obvious overcharges. We now have thirty employees and plan to expand to between 50 and 75. However, I do not plan on hiring people from the insurance industry for the reasons mentioned above. Instead, we hire bright people with the capacity to audit. Then we teach them how to audit.

Are you hiring an auditing firm or a consultant?

If you need advice on risk management, classifications or claims management a consultant may suffice. However, if you want to know if your premium is correct, if your experience modification factor is correct, or if you’ve overpaid premiums, you need an auditing firm. Expecting a company other than an auditing firm to provide an audit will not result in success – but – would you ever know?

How do I know if a company is an auditing firm or a consultant?

Anyone can claim to provide an audit but an auditing firm will adequately answer all of the following questions.

• Do they have an audit procedure?
• Do they use an audit checklist in combination with their procedures?
• Do they have a quality control process? What percentage of completed audits do they sample?

What about price?

As with most products and services, you get what you pay for. There are companies who offer 30% or 40% contingent fees. Would you rather recover 70% of $5,000 or 50% of $100,000? If all things were equal, the lower contingency fee should decide who you hire. Clearly, all things are not equal.

How do I know who will recover the most money for me?

A reputable auditing firm that has been in business for a reasonable amount of time should be able to provide you with:

• Overall success rates.
• Success rates broken down by category of client. An explanation of the category should be understandable.
• Probability of recovery for accounts similar to yours based on their experience.
• Average recoveries for the profile of accounts similar to yours.
• Largest recovery in each category of clients.
• Number of recoveries exceeding some number – say $100,000.

If such information is not readily available, I question the company’s expertise.

How do I know if the company has a reasonable amount of experience?

Any company can claim to provide a premium audit regardless of their expertise or experience. The following questions will help you to know if the company has a reasonable amount of experience.

• How long has the company been in business?
• How many employees do they have?
• How many clients have they served?
• How many audits have they completed?
• How many audits have they completed in states where you do business?

What are other considerations?

• Does the company utilize its own sales force or does it outsource?
• Check references but remember this is a “happy customer” list.
• Ask the reference about communication. Were they satisfied?
• How long did the audit take?
• Did they assure that the refund was received prior to billing or did they bill prior to the company receiving the benefit?
• Have complaints been registered with the local Better Business Bureau?
• What is the principal’s background?
• What is their experience with state departments of insurance?
• How do they support you if a complaint to a state department of insurance is required?
• How does the company support you if you wish to attend a hearing or pursue legal action?

If a company cannot adequately answer the questions posed in this letter, you are probably not speaking with a professional auditing firm. Our in house sales staff would be happy to answer any of the questions listed above. I think you will like what we have to say.

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

I am absolutely amazed by the number of business people, insurance agents, and insurance brokers that claim to understand the workers’ compensation experience modification factor when they have basic knowledge at best. As a business person, how do you know who to believe? If the supposed “expert” doesn’t really understand the experience modification factor to the degree that they believe they do, can you trust them to assure that your experience modification factor is correct?

Here is one way to check basic knowledge. Consider asking, “What impact would changing payroll from a given classification code to a classification having a lower rate have on future premiums?”

Recently, I spoke at a seminar and asked this question. I even provided multiple choice answers.

1. It would be a good financial decision
2. It would be a bad financial decision
3. I don’t know
4. There isn’t sufficient information given to make the decision

Only one person in the audience had the correct answer even though many of the attendees were claims managers and insurance agents.

It is true that moving payroll from an existing classification to a lower risk classification will reduce current year premiums but it will also put upward pressure on (typically) three future modification factors. The upward pressure on the mods will in turn (typically) put upward pressure on three future premium years. The total cost impact can only be determined by performing an analysis that considers present and future impact of the change. This analysis will require assumptions concerning payroll and incurred losses for future years. Therefore, the answer is, “There isn’t sufficient information given to make the decision.”

The bottom line is – when you have a choice between classifications – don’t limit your analysis to the impact on the current year premium as most companies and agents do. Instead, include the impact on future premiums in your analysis. If your agent, broker, or employee doesn’t understand future impact of the change – you must get qualified help. If you don’t get qualified help, you risk making a costly financial decision.

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

It is a sad fact, but it is painfully true.

• You can have the best risk management program in your industry and still overpay your insurance premium.
• You can have the most aggressive and effective claims management program in your industry and still overpay your insurance premium.
• You can select the best insurance program for your situation and still overpay your insurance premium.
• You can select the most knowledgeable insurance agent/broker available and still overpay your insurance premium.

How can this happen? It happens all of the time for several reasons.

• Insurance carriers report the payroll and incurred losses directly to the rating association. No entity other than the carrier reviews the reports for accuracy. Who would know if there is an error that is costing you money?
• It is common for individual states to have rules and laws that are not consistent with the national rules. In such cases, carriers may not be aware of the rule and therefore may overcharge you. Who would know the difference?
• Underwriters are not expert on every rule and exception that exists in every state. Carriers make a great number of errors that go undetected.
• Carriers are typically required to file plans with the departments of insurance in the states where they do business. However, carriers do not always comply with their filed and approved plans. How would you know if they didn’t comply?
• The civil servants in your State Departments of Insurance that are given responsibility for assuring that insurance carriers comply with state rules are typically understaffed. State Departments of Insurance, in my experience, are ineffective in enforcing the national and state rules. In our experience, they are also ineffective in assuring that the carriers comply with their filed plans.

The bottom line is: An audit of your workers’ compensation insurance premiums by an independent auditing firm must be an integral component of your workers’ compensation program if you wish to control your costs. Such an audit can provide you with the tools that you need to identify and recover overpaid premiums.

Our experience says that – in most cases – if you pay more than $100,000 for workers’ compensation insurance, have experience modification factors that exceed 1.00, and are on a fully guaranteed cost plan, the probability that you have overpaid your insurance premiums approaches 70%.

If this angers you, contact us. You need not be held hostage. We can help.

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

Many companies believe that their employees are assuring that their premiums are correct. I must warn you that if you expect your employees to assure that you aren’t overpaying your premiums- you are expecting too much.

Your staff is likely doing everything in their power to assure that you aren’t overpaying – but trying isn’t enough. Your employees who are responsible for monitoring your workers’ compensation costs aren’t trained auditors anymore than they are trained attorneys or CPAs. If employees were capable of getting the job done, we wouldn’t have recovered millions of dollars for our clients and our probability of recovery wouldn’t be over 70% in many categories. In addition to exceptional recovery rates, our recoveries are significant. It is not uncommon for our identified recoveries to exceed $100,000.

Many companies understand that their employees can’t be expected to assure that they aren’t overpaying premiums but they do expect their insurance agent or broker to be the watchdog. Again, I must warn you that if you expect your insurance agent to recover overpaid premiums – you are expecting too much.

Your insurance agent is also likely doing everything in his or her power to assure that you aren’t overpaying – but agents aren’t trained auditors anymore than your employees are. If agents did what we do, would some of the best agencies and brokerage houses introduce us to their clients? Would our recovery rates be as high as they are regardless of agent involvement?

In some cases, employees or agents don’t want us to do the audit. Is it because they truly believe that they are able to do what we do? Is it because they are concerned that we will recover money and by doing so make them look bad?

I must leave the answers to the questions posed in the previous paragraph to you. However, I can tell you that if you pay more than $100,000 in workers’ compensation insurance premium, have experience modification factors above 1.00, and are on a fully guaranteed cost plan, the probability that we will recover money for you exceeds 70%. This fact is true regardless of the involvement of your employees or your insurance agent. If you have credit mod factors, the probability of recovery is also very high.

If you still believe that your staff and/or agent is assuring that you aren’t overpaying your premiums, please give us a call we’ll explain why it is next to impossible for anyone other than a trained auditor – who is expert in the national rules and who is current in state exceptions – to effectively audit premiums.

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

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 savings@synergeticsolutions.com or toll free at 800-758-2941.

If all things are equal, one should select the lowest price when hiring an auditing firm. However, ALL THINGS ARE NOT EQUAL. In fact, consultants and auditing firms typically perform different functions. Also, companies that claim to be auditors may not know the first thing about auditing. Following are a few tips that can help you decide who you should trust to audit your experience modification factor, classifications, claims, or premium in general.

1. If the consultant’s fee is contingent upon performance, be sure it is contingent on the consultant’s performance and not yours, your agent’s, or someone else’s performance. I have seen a contract provision that shocked me. I can’t believe anyone would agree to such terms. The terms say the agreement is “exclusive.” That is, no other entity may be engaged to perform the same work. This is not unreasonable in and of itself. However, the article goes on to say that you or your agent may resolve any dispute you want but you agree to pay the consultant anyway. Wow! Does that mean the consultant doesn’t even have to prove they did the work that resulted in dropping your premium? Does that mean you or your agent can’t correct anything without you owing the consultant – who did nothing? If you see this provision, BEWARE. Be sure to speak with your attorney on this one. There is no way I would ever sign such a provision.
2. Confidentiality and non-disclosure provisions are not always unreasonable. However, I have seen a contract provision that requires the client (you) to obtain permissions before any information is disseminated to a third party. This may not be unreasonable if it pertained to the consultant’s trade secrets or proprietary information, but this article didn’t. Instead, it includes all information obtained from anyone having to do with any aspect of the work or anything anticipated. Does this include your own information? What about loss runs, policies, and premium audits? If you see this provision, BEWARE. Obtain the advice of your attorney before signing.
3. In my opinion, every contract should have a definite term. If not, how do you know when it is finished? I’ve seen many related issues as a result of companies not knowing when the agreement has expired, or if it even has expired.
4. Certain companies say they will perform a premium audit on-site. They ask that you have all data you want audited available for their scheduled visit. BEWARE. I estimate that my company has conducted in excess of 20,000 compliance audits, and I can tell you it is rare indeed to have all data required to perform the audit available day one. Audits follow audit trails. That is, auditors start with basic data and follow audit trails. If companies don’t do this, I wouldn’t trust their audit because they are not performing one. And, if a company is not performing a thorough audit, not all of the errors that could be corrected will be, which means you could be leaving money on the table.Furthermore, when companies want to come to your site to perform the audit, I suspect they are focusing on classifications. This in itself is not bad but – BEWARE. There are horror stories out there and I wouldn’t want you to be a victim of one.Let me explain. If a company comes in and changes a classification resulting in return premium of $50,000 that’s a good deal – right? If you pay a contingency fee of 50%, it was a good deal – right? NOT NECESSARILY. The classifications used should be what are required by state-specific classification placement rules. If not, the insurance company has every right to change them back.If rule allows for an employee or a group of employees to be classified under one of two different classification codes, here is the bottom line. Moving payroll to classifications with a lower rate may result in lower premiums in the current year. What you may not be told (or what the consultant may not know) is that such action may place upward pressure on future modification factors and could result in higher future premiums.Let’s go back to our example. In our example, your consultant moves payroll from one classification to a different classification having a lower rate. The change results in a $50,000 reduction in premium. You gladly pay the 50% contingency fee and never realize the change increased three future experience modification factors. Let’s say the increase in the modification factors resulted in an increase in premium of $25,000 per year or a total of $75,000. Therefore the net effect of the change was a loss of $25,000 prior to paying the consultant’s fee. After paying the consultant, you lost $50,000 – not a good deal – BEWARE.Any consultant or auditor worthy of the title can provide you with the net result of the change in classification code. That is, they should be able to tell you how much your premium will be reduced in the current year, as well as provide you with an estimate of how much your premium will increase in future years. If they can’t, BEWARE. Be sure any contingent fee for classification changes is determined by taking into consideration the total impact of the change not just the current year.
5. Are you hiring a consultant or a compliance auditor? They are different. Consultants many times are looking only for specific issues and are not performing a thorough compliance audit. That is why we go behind anyone and typically find overpayments. One common tactic of a consultant is to check for specific classifications. For example, there is a difference in “precision” machining versus machining. The consultant may target your company because you are a machine shop and s/he is aware of the difference in rates. The consultant comes in, makes the change, and is finished. There was no in-depth audit. This is not necessarily bad as long as that is what you expect the consultant to do. But, please don’t compare this situation – regardless of if it is called an audit or not – to our in-depth compliance audit. Also, if this is the case, be sure to read item 4 above.
6. If the company you are hiring negotiates claim reserves – BEWARE. Many states require such companies to be licensed. If you operate in one of these states, be sure your consultant is appropriately licensed.
7. Which is a better situation – a company that charges 50% or a company that charges a 30% contingent fee? IT DEPENDS but BEWARE of low contingency fees. You do get what you pay for. Some companies that charge a smaller contingency fee do so because they “cherry-pick” the issues that will result in the largest recovery – without performing a thorough audit that identifies (and corrects) all issues. Furthermore, there is another issue that may arise if you agree to a lower contingency fee. If you agree to a contingent fee of 50% of premium reductions in the current and historical years, your consultant or auditor provides proof of their work, and your consultant or auditor lays no claim to future premium reduction resulting from their work, you know exactly what you are paying for. Every reduction in premium can be proven. However, if a company charges 30% but lays claim to impact on future premiums, you could end up paying more than you would have if the fee was only calculated on existing premium. This leads to serious issues because it can be very difficult to determine the impact of a change on future premiums. If you are paying on estimated impact, BEWARE. If you agree to pay a contingent fee based on future impact, or if the agreement is not clear on this issue, be sure you understand the mechanism for determining how you will pay for the impact on future premiums. Please call us if you need help.
8. Companies or individuals may claim to be auditors and not be. That is a matter of definition. If a company has specific audit procedures or checklists, has a quality control review for every audit, and documents their work, they may be an auditing firm. If not – BEWARE.
9. We’ve received many complaints concerning consultants’ lack of communication. After signing the agreement, some companies seem to disappear. You should expect scheduled communication to provide audit updates, as well as communication when a finding is identified, and updates throughout the audit process. If your consultant is not willing to add a communication requirement to your agreement – BEWARE.
10. An auditing firm should be able to provide you with very specific results for companies having profiles like yours. After all, auditing firms are numbers people. If the company or individual claiming to be an auditing firm can’t supply you with detailed historic audit results such as; probability of recovery, average recovery, largest recovery, and number of audits or policies performed for companies having profiles similar to yours – BEWARE. They probably just think they are an auditing firm.
11. If you are introduced to an individual or company by your agent, be sure to determine what the relationship is between your agent and the company (individual, consultant, or company). If money exchanges hands between the two of them – BEWARE. You should expect the consultant or agent to act in your best interest. If they are too close to your agent, undue influence can be exerted. For example, we have been asked by referring agents to “walk away” from a finding without telling our client. If we are asked, I’m sure the same happens to others. We do not “walk away” without advising our client of the situation. The decision to “walk away” from a finding belongs with you – the client – and not with the agent. After all, the agent may lose commissions on the recovered premium. Remember, the agent is the sales “agent” of the insurance carrier and there may be a conflict of interest. Unless you are sure the consultant is acting in your best interest – without conflict of interest – BEWARE.
12. How does your agent or consultant find business? Does it use its own market research and sales force? Or, does it pay commission to anyone who will bring business? If the latter is true – BEWARE.
13. Are you hiring a company or an individual? It is easy today to have the appearances of a company but actually be operating with one or two people out of a spare bedroom. That is not to say that individuals can’t be effective if operating by themselves or with another person or two. After all, some very successful companies, including ours, started out in spare bedrooms. However, BEWARE of the risk. Will they be there tomorrow? Do they have the resources to serve you adequately?