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Jan 11, 2010

A “Perfect Storm” for Workers Compensation

By Colin D. Baird, Vice President

This year’s predicted “El Nino” for California still remains to be seen, however three eerily predictable factors are likely to cause havoc and increase damage on employer’s Workers Compensation programs for the foreseeable future.

(1) A significant increase in medical and indemnity claims has driven the cost of claims to insurers to levels not seen since 2003, when rates were at their peak. Actual rates which finance those claims however today are 1/3 of the rates from 2003 when rates were at their highest. This disparity between actual claims costs from the insurers, and the actual price to employers has put enormous pressure on insurers to rapidly increase their costs to offset this 2/3 difference.

(2) A decrease in payrolls due to the significant downturn in the economy will most likely continue to increase Experience Modifiers as expected losses fall, but actual losses for the employers remain constant.

(3) Due to the new formula used to compute Experience Modifiers in California, 40% of all employers in California will see an increase in their ex mod. According to first quarter data just issued by the WCIRB of California, 6% of experience rated policyholders are seeing increases in their Experience Modifications anywhere between 11 and 20 points, and 2% are seeing increases of more than 20 points due to these formula changes. The small number of policyholders experiencing large increases are generally employers with worse than average underlying loss experience. This means employers who have already suffered many losses and higher Experience Mods, will now be subjected to even larger increases due to the new formula.

This “Perfect Storm” could not come at a worse time for California employers. With 17-20% unemployment, increased taxation likely, and decreased revenues continuing, these increases in Experience Mods may just drive more employers to other states where claims costs are still relatively under control.

What can you do to control your future cost increases?

First, begin by understanding that Experience Mods are a controllable cost for all employers. While you may not be able to truly control the costs that insurers charge you for the basic cost of insurance, you can certainly learn how to control the debits applied to your workers compensation bill because of your Experience Mod.

Experience Mods are a function of actual claims experience versus expected claims experience. The formula is quite simple, where actual claims experience (represented in this equation as N) is the numerator and expected claims experience (represented in this equation as D) is the denominator. N/D becomes your experience mod. You can control N, but you cannot control D. N is your actual result from your ability to control safety at your company, but D is established by the state based upon the expected losses for your particular industry.

Secondly, you need to know what your future Experience Mod will likely be well in advance of your workers compensation renewal. Ask your broker to help you compute the future Experience Mod so you know what debits will be applied to your new work comp bill. In addition, knowing this information ahead of time will help you better negotiate with insurers at renewal, as you will be armed with information they use to evaluate your risk.

Lastly, understand what the Lowest Possible Mod (LPM) could be if you were claims free from workers compensation claims. This LPM can be used as a benchmark for determining how successful your program actually is versus what it could be. The difference between the LPM, and your actual mod is the lost opportunity costs to you, from your own particular safety program.

Just how much money is at stake? If an employer pays $1,000,000 for basic workers compensation, and has an Experience Modification of 150%, his actual cost would be $500,000 with an LPM of 75%. If the companies EBITDA selling multiple was 7X, the new valuation of the company would be increased by $3,500,000 for each $1,000,000 in workers compensation costs if the company hit its LPM mark and was claims free. The lost opportunity costs would be $500,000 for each year the ex mod stayed at 150%. With a 7.2% discount rate, that equates to a direct impact of $3,853,540 over a six-year period.

With CFO’s looking for new methods to improve earnings, but not reduce staffing any further, reducing Experience Mods may help pave the way.

About Colin D. Baird

Colin D. Baird specializes in helping corporations reduce their worker’s compensation experience modification and securing the most advantageous worker’s compensation insurance coverage. He focuses on both privately held and publicly traded companies, whose workers compensation expense exceeds $250,000.

Colin has been in the risk management and insurance business since 1987. He enjoys writing, in addition to teaching courses in workers compensation and the application and reduction of the experience modification.

Colin can be reached directly at 626.683.6101 or

About SullivanCurtisMonroe

SullivanCurtisMonroe Insurance Services, LLC is a privately held, full-service insurance agency offering commercial property & casualty, employee benefits and personal lines coverage. SCM services a wide range of clients and has enjoyed a number of long-term relationships.. SCM has 200 employees, with offices in Irvine, Pasadena and Corona, California.