Buying workers’ compensation insurance is a lot like purchasing gas for your vehicle. Your company is a car with an empty tank and insurance carriers are gas stations looking to win your business.
Gas stations (insurance carriers) are homogeneous – the only real differences between them are their logos and the fuel costs. Gas stations understand that price is the main reason someone would choose to fill up at their pump rather than the pump across the street. Yes, a handful of individuals might choose them for other reasons; clean bathrooms, good snack selection or even lottery winning success. However, we can all agree that the main reason is their lower price of fuel.
Automobiles (companies), on the other hand, are heterogeneous. Nowadays, automakers try to feed America’s appetite for individualism and materialism by providing unique vehicles for people. At times, it is rare to find two cars of the same make, model, year, and color driving down the same road. In addition to the differences in the vehicle’s shape and size, they are also unique by their MPG’s. For this example, your car’s efficiency is an extremely important characteristic if you want to save money at the pump.
Gas Prices on The Rise
You may have noticed recently that gas prices are very high. In fact, they haven’t been this high since 2014. If you look at a chart that plots gas prices over time, you will see that the line is parabolic (cyclical). Without getting into an economics lesson, this chart is simple to explain: The variation in gas prices is caused by supply, demand, and geopolitical factors. Oil prices go through cycles of highs and lows, and at this moment in time, we are trending upward. This pattern is ubiquitous in our society; common examples include the stock market, inflation, house prices, and INSURANCE RATES.
Did you know that we are in what is defined as a hardening market for insurance rates? We last saw this cycle in the early 2000s. Some describe this cycle as an ‘underwriter-driven hard market.’ While there are many factors for the increase in rates, the main reasons include: Catastrophic losses, the rise of social inflation (litigation), COVID, and interest rates.
At this point, you may have a good idea of where this example is going. Let’s finish setting the stage.
Filling Up the Tank
You are driving to work, and your gas light comes on – it’s time to stop for gas. Where should you fill up? On the left-hand side of the road, Gas Station A is advertising prices that are a few cents less than its competitor across the street, on the right-hand side of the road. For obvious reasons, you decide to pull into Gas Station A to save some money.
After filling up, you look at the receipt and are stunned by how much you just paid. You think, “$60?! I was paying $40 per tank a year ago!” You are suddenly overwhelmed with frustration. Week after week, your frustration gets worse and worse every time you fill up another over-priced tank. Eventually you get the point where you realize that no matter which gas station you stop at, you will continue to pay more for gas than you want to. But then the light bulb goes off – what if I buy a new car with better MPG’s?
Winning at the Pump
Once buyers understand that they can control the price they pay for gas; instead of relying on factors out of their control, they can start winning at the pump and saving money. Much like trading-in for a more fuel efficient vehicle, companies can change the inner workings of their organization to cut labor costs and improve their bottom line.
How can companies cut Workers’ Compensation costs?
The two main factors used to calculate Workers’ Compensation premiums are:
1) Company Payroll
2) Job Classification (class code) Rates.
Workers’ Compensation insurance covers medical and disability payments for employees injured by workplace accidents. For insurance companies to match risk to price, they must understand how much employees are ‘worth’ (payroll). The employees’ payroll is then multiplied by their respective classification rate. Certain jobs are riskier and more hazardous than others, so the insurance carrier will charge different rates depending on the work performed.
Although company payroll and class code rates are the main rating factors, they are not the factors a company needs to change to cut Workers’ Compensation costs. If a company paid less in payroll, their labor wouldn’t produce the same revenue. If a company switched class codes, then the company would be selling a completely different product or service. For a company to cut Workers’ Compensation costs, they must look closer at their policy for a rating factor that most employers either don’t know about or fail to understand.
The Experience Modification Factor (Ex Mod)
Experience rating is a mandatory process that modifies the published rates for workers’ compensation coverage based on a comparison of your past losses to your industry’s average losses. An Ex Mod below 1.00 means your recent work comp claims were below industry average and therefore your premium will be less than the average employer (issued credit). An Ex Mod above 1.00 means your recent work comp claims were more severe than your industry peers and therefore will be paying increased premiums for your organization (issued debit).
Impact of the Ex Mod
The Experience Modification Effect is the impact claims leave on a workers’ compensation premium. The Ex Mod Effect’s impact can vary depending on the size of the organization, hazard level and claims experience. Let’s take a deeper look:
Example 1 – 1.30 Ex Mod (Debit)
Company A – $10,000 Work Comp Premium x 1.30 Ex Mod = $13,000 Modified Work Comp Premium
Company B – $50,000 Work Comp Premium x 1.30 Ex Mod = $65,000 Modified Work Comp Premium
Example 2 – 0.70 Ex Mod (Credit)
Company A – $10,000 Work Comp Premium x 0.70 Ex Mod = $7,000 Modified Work Comp Premium
Company B – $50,000 Work Comp Premium x 0.70 Ex Mod = $35,000 Modified Work Comp Premium
As you can see above, The Ex Mod Effect is different depending on the size of the initial Work Comp Premium. The bigger a company’s initial work comp premium (payroll and industry hazard level), the larger the variance of The Ex Mod Effect. For employers to achieve the ultimate cost-savings on their workers’ comp policy, they must reduce employee injuries.
Road to Your Minimum Mod
If you decide to invest the time and resources to achieve your lowest possible Mod, then you not only can save your company premium dollars, but also the “indirect costs” associated with each Work Comp claim. According to OSHA, your return on investment (ROI) is more than 2 to 3 times on average of what is spent on your loss control efforts. In fact, more than 60% of CFO’s reported that every $1 invested in injury prevention returned $2 or more, and over 40% said that productivity was the greatest benefit of an effective workplace safety program.
Your workplace safety program’s financial return on investment (ROI) is revealed through increased productivity, savings from fewer injuries and lower Workers’ Compensation costs – though these savings may take time to realize. The Experience Mod that adjusts your Workers’ Compensation premium up or down may take up to three years to fully realize, but the other costs of safety (both direct and indirect) would accrue immediately – every time a process is improved, or an accident or injury is prevented.
Both direct and indirect costs of workplace injuries are important to evaluate for your business and the impact it has on your bottom line. Choosing to implement safety and loss control programs are proven to have a long-term savings impact. Much like switching to a more fuel efficient vehicle, relying on what you can control will always be the more advantageous strategy.