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By PETER ROUSMANIERE, an expert on the workers' compensation industry

If you are an employer, just how fair and accurate is your workers' compensation insurance premium?

Consultant Bonnie Brook said that the large majority of premiums are, in roughly equal measure, set too high or too low by at least 5 percent. Brook is president of Stephenson & Brook, a risk management advisor with offices in Massachusetts, Florida and New York.

Ed Priz, another consultant, said, "We have found that somewhere between one-third and one-half (of premiums) contain a significant premium overcharge."

He estimates that, for a $100,000 policy, typically he finds some $25,000 in overcharges spread over two or three policy periods. Besides consulting to employers on premiums, Priz, president of Chicago-area Advanced Insurance Management, has been an expert witness in court cases involving premiums.

James Moore, president of J & L Risk Management Consultants of Raleigh, N.C., agreed with Brook's and Priz's view that the prevalence of inaccurate premiums is high.

WHO'S TO BLAME?

None of these consultants blamed the insurance brokers who place workers' comp policies for their clients. The consultants said that premium-setting is a very technical matter. It takes a prodigious amount of focused experience either to set or to analyze the accuracy of a premium.

A certain level of imprecision is to be expected, arising from judgment calls and errors that creep into the complex calculations.

Simply stated, the premium before experience modification is compiled by classifying workers by the code used in a particular state, and then applying the standardized premium rate for each class, per hundred dollars of payroll.

The experience modification--once again, a simplification--adjusts this initial premium calculation by the insured's recent loss experience. The "ex-mod" is based on the insured's experience over three prior years.

Disputes are more common among guaranteed cost plans--that is policies for which the insurer is responsible for all losses or at least all losses over a nominal deductible. In guaranteed plans, complicated formulas decide the premium level, and every claim dollar is driving the premium. In high-deductible plans, on the other hand, rates are more negotiated, and because the employer has retained a large share of the risk, there in effect less to dispute.

MOST COMMON ERRORS

The most common errors include misclassification of employees. There can be an honest dispute about, for instance, whether a particular staff should be classified as sales force or office workers. The difference in premium rates can be substantial.

Then there is the matter of whether certain workers are employees at all, as opposed to being independent contractors. Because companies do not pay workers' compensation insurance or unemployment insurance and do not deduct state and federal taxes for independent contractors, a lot of public agencies have dogs in this fight.

State regulators have been toughening the criteria that justify a company to list a person as an independent contractor. Still, premium consultants told Risk & Insurance® that they find instances where an employer could legitimately list an employee as an independent contractor but does not.

A third area of dispute is the appropriateness of claims reserves. Reserves help to drive the experience modification factor. By successfully disputing a high reserve, an employer will often get its experience modification lowered.

Are premium calculations less accurate than in the past?

Moore believes the extent of premium inaccuracy has remained fairly constant.

"I think they have stayed the same. Insurance auditors are being pushed to the limit due to reductions in staff. This could have easily led to premium inaccuracies. Technology has aided them in keeping pace on their reserving practices," he said.

State regulators apparently do review the accuracy of premiums in their jurisdictions. Gregory Quinn, a spokesperson for the National Council of Compensation Insurance, said that state insurance departments review the accuracy of premium charges by several means. They have customer complaint divisions, which follow up and ensure correctness of policy provisions, and they conduct targeted and full carrier examinations to ensure correctness of classes and modifications.

"For our part, NCCI has a robust inspection department and we conduct classification inspections to ensure correctness," Quinn added.

March 11, 2010

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