Controlling insurance costs Featured

8:00pm EDT May 26, 2007

Not only is it good business to provide a safe workplace, it is a legal responsibility. Accidents do happen, no matter how many reasonable safety measures have been taken. To protect themselves from lawsuits, businesses must purchase, as a separate policy, insurance that provides medical care and compensation for lost income to employees hurt on the job. This applies whether they’re hurt on the workplace premises or elsewhere, or in auto accidents while on business. It also covers work-related illnesses.

“In many cases, worker’s compensation (WC) is the third largest expense in the budget after payroll and employee benefits,” says George L. Moody, licensed risk manager at Arthur J. Gallagher Risk Management Services Inc. “While many business owners feel they have no control over that cost, it is actually an area over which they can have the most control.”

Smart Business talked with Moody for more insight on how to save on WC insurance.

What are some ways to reduce the cost of WC?

There are four primary areas that should be monitored to assure business owners that they are paying no more than they should for WC. These areas are: experience modifiers, payroll audits, hiring and claims management/return to work.

How can hiring practices affect WC costs?

It is vitally important to make sure that you are hiring people who can do the job. Of course you must follow ADA guidelines, but provide a conditional offer of employment when you think you have the right person. The offer is contingent on them passing whatever physical and medical tests are necessary to determine if they can do the job. Have a detailed job description that outlines the requirements. Make sure that all your forms are reviewed by an experienced attorney to assure that they meet all legal requirements.

What should be included in payroll audits?

Monitor the premium audit closely, since most errors favor the insurance company. Make sure the premiums are accurate. Look closely for any clerical errors. Verify that payrolls are correct and that you are only including the correct amounts. The insurance company is entitled to a premium based on the actual work the employee is doing. Bonuses for ideas should not be included. In Texas, safety bonuses should not be included in salary figures used for the premium.

Each state has different rules, so make sure that you and your insurance adviser are up to date on your state’s laws. Contractors that are doing government work and must pay prevailing wages should look at that closely. There are ways to set aside the difference between normal wages and prevailing wages and only pay the premium on your normal wage. Severance pay is another item that should not be included in the premium calculation.

What are some experience modification strategies?

The experience modifier is calculated by comparing expected losses against actual claims. As long as actual claims are lower than the expected losses, the modifier will be less than 1.00. Check for any mistakes in the calculations, and when identified, bring them to the insurance company’s attention. In most states, large claims are capped and anything over that cap should not be included in the experience modifier rating. Again, it is vital that you work with someone who knows the state rules. Since claims are included in the calculation for a three-year period, any savings found are three-year savings.

What are some claims management/return to work strategies?

Have a package of information available so if an injury occurs the employee understands what to expect and how the company will help him or her. Set up a team of individuals to make sure an injured employee is getting the care he or she needs and making progress they should to get him or her back on the job ASAP. Communicate with physicians what the job entails so they understand and can help get the injured employee back on the job without undo delay. This reduces care costs and replacement worker costs, which translate into premium savings. This is important since, as a general rule, every claims dollar costs the employer about two dollars in additional premium. Continue to provide good communication so the employee knows you care, feels important and will do all he or she can to get back on the job.

Finally, take a risk management approach. Don’t just find a policy and pay the premium. Work with an experienced person who can help assure that you are getting the coverage and service for you and your employees without paying more than you should.

GEORGE L. MOODY, CIC, CWCA, CWCP is a licensed risk manager with Arthur J. Gallagher Risk Management Services Inc.

Reach him at (281) 655-6824 or