Step 1 – Discovery
If your workers’ compensation costs suddenly went up, your first step is to find out why. There are a multitude of reasons your workers’ compensation insurance premium may have increased, so you’ll need to do some exploring to discover what the root cause(s) were.
Losses are a very common reason why your premium may have increased. It’s important to keep in mind that not all losses are created equal. In order to determine if losses are causing your premium to increase, examine the frequency versus the severity of your reported losses. Do you have frequent losses on a minor scale? Do you have one or two major losses? Both types of losses can impact your premium.
If your payroll has increased recently, this may have precipitated a jump in your workers’ compensation premium. While hiring new employees is a good thing, it automatically raises your payroll, which is the primary element that workers’ compensation insurance premiums are based upon. Whether it’s multiple new employees or a single major hire, an increase in payroll can trigger an increase in your premium. One thing you can do to mitigate this is to ensure that all of your employees are properly classified. Misclassification is a small mistake that can easily cost your company big money over time.
It’s possible that an audit caused a large premium jump as the auditor is actively looking for holes. While you can’t do much about past audits, you can analyze why you were not prepared for the audit in the first place, so that you can be more readily prepared for the next one.
Before the auditor arrives, make sure that you designate a primary contact person for him or her. This contact person should be someone who is very familiar with the work done by all departments and all employees, as well as someone familiar with the payroll records that the auditor will be reviewing. Take the time to carefully project what your payroll will be at the end of the year for each of the class codes that apply to your business. This may not be the most enjoyable use of your time but it is time well spent.
In addition, be sure to collect and have the following documents available upon request:
- Accounting ledger
- Tax forms, particularly form 941 and 944, and Employers Federal Tax Return (quarterly and annual, respectively)
- Records of cash disbursements
- Payments for services provided by independent contractors and subcontractors
- Certificates of insurance for each subcontractor and all independent contractors hired
- W-2 and 1099 forms
- Job descriptions for each worker; making sure it accurately describes the worker’s duties
- Description of business operations
- Payroll records for the term of the policy
- The company’s experience rating worksheet
Now that you know what’s driving up the cost of your premiums, it’s time to develop a strategic game plan to bring them back under control. If you found that losses are the main cause of this increase, order a loss history report.
This report determines frequency versus severity, identifies open claims and losses and inflated loss reserves, and determines if any losses can be subrogated against someone else.
If payroll is the root cause of the increase, it is imperative that you check to make sure your payroll numbers are accurate. Any mistake in these numbers can drive your premium sky-high. You’ll also want to make sure that every one of your employees is classified properly. Misclassification is one of the most common mistakes that result in premium costs soaring.
If an audit was the culprit for your sudden workers’ compensation insurance price jump, prepare to self-audit your business. In this self-audit, you’ll want to verify that both payroll and employee classifications are correct. You’ll also need to delete overtime and holiday pay as well as capping the owner’s pay. Make sure you are getting all of the credits available to you.
Step 3 – Execute
You’ve figured out what is causing your workers’ compensation insurance to rise and have laid out your game plan. Now it’s time to execute that plan. The most important part of this process is taking the correct action steps.
First, you’ll need to look at how you are handling loss issues. If you find that you’re having frequent issues, how can you mitigate those losses? If you find that large losses are to blame, could they have been avoided? Is there a large loss reserve unpaid? If there are large reserves, be sure that someone on your team is following up on the claim at least once a month. A reserve has the same impact as a loss until it is reduced.
Losses are going to happen, but if you develop an internal program to better handle losses in the future, you’ll see better results. This program will likely include an occupational clinic for treating employees. Using an occupational clinic can reduce a medical bill by 30% on average compared to emergency room visits, and they are much quicker. Be sure that you inform the clinic that you’d like to receive the bill directly from them.
Implementing a back-to-work program can have a significant impact on your workers’ compensation expenses while also boosting morale. When an employee is in a back-to-work program, you’ll continue to pay them and require that they do tasks that are manageable for them and are not impeded by their injury.
Your program should include steps for handling a payroll issue. You’ll want to verify the correctness of payroll versus actual payroll records and make sure that payroll classifications are accurate. If you have split job functions within your company, speak to your insurer about classification options to make sure that these employees are properly classified.
Finally, your program should have steps in place for handling an audit issue. Prep yourself, your team, and your company for an audit so that you receive all credits on payroll available to you. Be sure to inquire about any other credits (i.e. construction credit) or any other carrier program with discounts or dividends.
By putting proper planning in place you will be able to control your workers’ compensation costs, before they control you.
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Nick Oates is a work comp specialist with Knight-Dik Insurance in Worcester, Massachusetts. He can be reached at noates@knightdik.com
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