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Apr 13, 2010

Learning What Is Possible

Do you know what questions to ask your advisors to determine what the best possible outcomes could be from your workers compensation plan compared to their current results? Do you know what the real difference in premium would be if your losses and claim costs were reduced? Have you ever asked? Do you want to know?

Well the good news is this, beginning in 2011 you'll at least know what your lowest possible ex mod would be if you were loss free. In 2011 your lowest possible experience mod will be shown on your California experience rating worksheet. The question is what will you do with that information once you have it? Will you know how to apply the lowest possible mod to your current program costs? What about this year's lowest possible mod, do you know what it would do to your premiums?

The Similarities Between Your Lowest Possible Tax Rate and Your Lowest Possible Ex Mod

Although the 2009 income year is behind us, the impact from last year's income begins one of the most frustrating single day events in our annual lives. April 15th is only one day away and you've probably got the news by now. I got mine this week.

Just tonight I had someone in my offices that made me think about my own tax advisor, and how much trust I have in her results. The real question though is, how did my CPA gain my trust that her results were the best possible outcome for my business? Many great tax advisors gain their taxpayer's trust by educating their clients and explaining in great detail what deductions have the greatest results on the taxpayer's bottom line.

I'll get started by explaining that my CPA Jennifer, (my tax advisor for many years now), has her own work reviewed each year by an outside peer review committee that reviews her work, and that of the other CPA's in her firm. Her firm spends thousands of dollars in fees to have their work reviewed. Imagine that, an advisor who gets a report card every year from her own peers. Additionally, every few years I'll spend a few dollars to have another CPA review Jennifer's work. I guess you could say I've learned how to measure her actual results and compare them against the best possible outcomes. If I am willing to accept the results, Jennifer continues to be remain my advisor, if not, I at least have valuable information that helps me make more educated decisions about the relationship in the future.

Now I'll certainly agree that I am not the normal taxpayer, but since I pay a lot in taxes, I want to make sure Jennifer gets it right and I don't leave any money on the table.

Do you do the same with your workers compensation plan and your advisors?

Most certainly you put your insurance out to bid every few years and save 10-12 percent, but do you know what the premiums would be if you reduced your losses and claims costs by 25, 50, or even 75 percent?

Let's say in 2009 you paid $1,000,000 for your workers compensation plan. Let's assume your experience rate was 150 percent. In 2011 you went to bid and reduced your premiums by 12 percent. Assuming the rates in your state stayed flat, you would have saved $120,000 each year for the next 3 years. The total savings would be $360,000. Your new workers comp premium would be $880,000 with a mod of 150 percent.

However, let's now assume that back in 2008 you also invested $30,000 in the necessary components to improve your safety plan, and closed out all claims thereby reducing your new and existing claims to their lowest possible level. Let's assume your lowest possible mod was achieved in 2011 (3 years after the plan's implementation), and your mod went down to 75%. Now let's look at the cash flow impact.

You would have saved the same 12 percent in benefits from shopping your insurance, but would have saved an additional 500k of the costs over the previous example. Your total workers compensation plan costs would now be 380K plus the 30k you spent in added safety costs. That's a total net improvement in cash flow of 470K. If you measure your bottom line in EBITDA and have a 4x multiple, that's an improvement in valuation of over 1.6M.

After you pay your taxes, find out what your lowest possible mod could be and what that would do to your premiums.

For more information on how to compute your lowest possibe mod and what it would do to your premiums, email me Colin D. Baird at