Introduction: Workers’ Compensation (WC) insurance costs to the dealership are increasing more than other costs and much faster than inflation. In this newsletter, we explain:
- How WC Insurance Premium is calculated based on payroll
- How manual premium rates are based on risks of the worker, e.g., the office worker has a lower manual rate compared to an auto service technician due to hazards on the job
- How employers with greater injury rates have a higher Experience Modifier (ex-mod)
- How a higher ex-mod results in higher premiums
- How WC rates have climbed over the years
- How Medical Indemnity has more than doubled over 15 years
- How Allocated Loss Adjustment Expense (ALAE) per Indemnity Claim has tripled over 15 years
Background: Workers’ compensation insurance is mandatory in the United States as well as in many other countries. The objective of WC insurance is to provide medical treatment and disability benefits to employees injured during the course of employment. The premium costs are borne by the employer alone, and the employer benefits by receiving immunity from employee lawsuits from alleged negligence, etc.
Cost Containment: WC insurance premiums are a significant cost to the employer. A prevailing trend on the part of employers is to contain all insurance costs, including WC premiums. These premiums increase over a base depending on the severity and frequency of injuries. As such, a reduction in injuries reduces insurance costs. The base insurance rate is a function of employees’ job duties, number of employees, payroll, and a modifier used to calculate the premium. The modifier is based on the losses incurred by the employer. The losses incurred by the employer are calculated based on the claims paid by the insurance companies for injuries occurring at the workplace.
Calculating Costs: In order to calculate the premium for employers in California, payroll data and losses incurred for a 3-year period are taken into account. The year immediately preceding the year for which the insurance is required is usually ignored. For example, if the premium is to be calculated for a policy beginning January 1, 2015, injuries occurring in 2011, 2012, and 2013 will be considered, while the 2014 injuries are omitted. Such calculations reflect a trend over a broader period rather than taking one year into account, possibly impacting insurance rates disproportionately.
Cost Savings: To illustrate insurance premium calculations (which may vary based on the difference in injury rates), hypothetical calculations were made for two employers, Employers I and II that have the same payroll. Table A shows the payroll data for each type of employee. Table B illustrates the excessive injuries of Employer I and Employer II. Employer II has four more injuries than Employer I, resulting in a total loss of $282,500 instead of a total loss of $45,004 during the same period. While the insurance company pays these losses, the difference for the two premiums is $174,570 for the year 2015. A savings of $174,570 for fewer injuries (Employer I, see Table C) offers a competitive advantage. The fact that injuries affect the premium rate for three consecutive insurance years shows how important it is to prevent workplace injuries. Investing in time, training, and equipment for employees is worthwhile, especially with significant premium savings of the magnitude described in our example. The benefits of being a caring, proactive, employee well-being focused employer in terms of employee productivity and morale are important additional considerations.
Table A: Payroll Data (both Employer I & II)
|Employee||Annual Payroll||No. of Employees||Payroll 2011||Payroll 2012|
|Clerical/Office Staff (code 8810)||$ 30,000.00|
|$ 600,000.00||$ 600,000.00|
|$ 50,000.00||20||$ 1,000,000.00||$ 1,000,000.00|
|$ 40,000.00||50||$ 2,000,000.00||$ 2,000,000.00|
|Total||90||$ 3,600,000.00||$ 3,600,000.00|
Table B: Injury Data & Losses Paid per Injury
|Claim #||Type of Injury||Incurred Losses||Type of Injury|
|1||Cut Finger||1||Back Injury|
|2||Cut Finger||1||Back Injury|
|3||Broken Finger||$ 10,000.00||Broken Finger|
|4||Cut Finger||1||Elbow Sprain|
|5||Head Injury||$ 5,000.00||Head Injury|
|7||Back Injury/Cum. Trauma||$ 25,000.00||Back Injury/Cum Trauma|
|8||Arm Rash||$ 5,000.00||Arm Rash|
*Death benefits are statutorily limited in certain states. For California, death benefits are capped at $320,000 but only $175,000 is used in the ex. mod. calculation.
Table C: Estimated Premium Costs
|Premium Based on Employee Count & Payroll||Experience Modification|
Total 2015 Premiums (before credits)
|Employer I||$ 264,500.00||85|
Note 1: Wages and employee count for employees in Table A are fictitious and used illustratively.
Note 2: Experience Modification in Table C uses California rates and formulas calculated on July 27, 2015 for a policy beginning Jan. 1, 2015. Calculations for other states may vary.
Note 3: Table C premiums are before underwriter’s “risk adjustment” debits, credits, or premium discounts (if any).
Note 4: Cumulative Trauma has replaced psychological disorders (psych), which were common in the past. Psych is not a ratable disability whereas Cumulative Trauma is. Hence Cumulative Trauma is more lucrative to plaintiff counsel.
Questions You Want To Ask, But Are Afraid To
1. What is the overall industry average charge rate per $100 of payroll?
1/1/1998 to 12/31/1998 = $2.33
1/1/2005 to 6/1/2005 = $4.96
1/1/2014 to 9/1/2014 = $2.93
2. What is the average attorney involvement in Workers’ Compensation Claims?
All Claims = 11.6%
Lost Time Claims = 38%; LA County = 46%
Permanent Disability Claims = 80%; LA County = 83.8%
3. What percentage of all Paid Indemnity Claim Costs in the California Workers’ Compensation Institute (CWCI) sample had Attorney Involvement?
Per the CWCI:
Attorneys were involved in:
38.1% of all indemnity claims.
82% of all claims paid out; i.e., $6.26 billion of the $7.6 billion paid.
4. What is the projected Ultimate Medical per Indemnity Claim?
Per the California Workers Compensation Insurance Rating Bureau (WCIRB):
1998 = $22,375
2005 = $31,787
2013 = $47,354
5. What is the projected ultimate Allocated Loss Adjustment Expense (ALAE) per Indemnity Claim?
Per the WCIRB:
1998 = $3,989
2005 = $6,139
2013 = $11,768
6. What is the Projected Ultimate Total Loss and ALAE per Indemnity Claim in Workers’ Compensation?
Per the WCIRB:
1998 = $47,539
2005 = $56,767
2013 = $85,373
Healthcare & Obamacare: Healthcare costs have outpaced general inflation significantly and WC costs have followed a similar trajectory. We note, WC costs involve medical care and indemnity which is based on salary of the injured employee. Obamacare has made health insurance mandatory for all employees and as such there are no uninsured individuals on dealership full-time payroll. Without health insurance coverage, an employee was more likely to label a personal injury as work related injury so as to obtain treatment. With proper health insurance coverage, an employee is not likely to follow that path and fraudulent WC claims would be reduced.
Download: August 2015 Newsletter