Managing your insurance budget is a little like controlling your weight. If you want to maintain your current level or even drop a few pounds, you can watch what you eat, you can exercise—or ideally, do both.
Likewise, in terms of insurance, you can save money by selecting the proper coverages, by limiting your losses or again, tackling the two in tandem.
In part one, (July 2006), I suggested you might want to re-evaluate your insurance "diet"-avoid some things, cut back on others and generally make more-informed coverage choices. This second part will focus on the other half of the equation: the exercise of managing your losses and learning from your claim experience.
Review Your Claim History
I've noticed many smaller contractors rarely review or even request their claim histories-known as loss runs-unless they're shopping for their insurance. That's unfortunate, because loss runs can teach you a great deal about events that are influencing your premium, including:
- The number of claims you've reported (frequency) and the amount of money that's been paid on each claim (severity) to date
- Trends or patterns that may indicate certain individuals, types of jobs or locations are generating an unusually high number of claims
- The frequency of low-dollar claims that might be cheaper to self-insure
- The impact of a single, unusually large loss
- The amount of money reserved for claims that have been filed but have not yet been closed (I will come back to this topic in a moment.)
With this information in hand, you'll be better equipped to understand how to reduce your claims. Perhaps new safety equipment would be worth the investment. Maybe there are some jobs that should be subbed out because your workers don't have the skills to perform those tasks appropriately. Or, it could be that a simple safety contest or financial incentive might focus attention on problem areas and lead to a change in behavior.
If you have not yet done so, one of the easiest and most effective changes to your safety program is to let your workers know that safety is important to you. So often, employees only hear of the need for reducing waste, working faster and improving work quality. If you don't take the opportunity to also mention the importance of safety, your employees won't think it is important.
Take the Initiative
Whatever the cause of your losses or the possible solutions you offer, it's critical that you challenge your loss control program to attack the root causes of accidents. Doing so not only will benefit your bottom line, but it also will demonstrate to insurance companies that you're serious about safety and managing costs.
Trust me, when it's time to negotiate your policy, insurers will ask you to explain your losses-why they happened, what you've done to address and prevent similar events and how you're monitoring corrective actions. If you can prove that you've done your homework and implemented an effective safety management program, underwriters will look at your business in a more favorable light.
Other actions that will help you differentiate your business include providing insurers with an operational overview, so they can gain a better understanding of what you really do. Show them a specimen set of contracts. Explain your quality initiatives. And ask questions that demonstrate you're looking for more out of an insurance partner than just the cheapest price.
Also, having current loss runs will help prospective insurers develop more-accurate quotes. That's because each time you file a claim, your insurer will estimate the amount of money needed to pay for the loss and put up a "reserve" on their balance sheet. Since they want to reserve enough money to pay the loss, insurers tend to set reserves conservatively. As a result, the ultimate, actual claim payment may be less than the estimated amount.
If you're working off dated loss runs, the quoting company will use those old estimates and add factors for each elapsed year to estimate what the loss could ultimately cost. But, if you have a current loss run, you can show them actual numbers. Chances are, those true results probably will work to your advantage.
Manage Your "Mod"
Your workers' compensation claim history also drives your company's experience modification rating, otherwise knows as your EMR or-more commonly-your "mod." Your mod not only impacts your premiums, but some general contractors and owners may also use EMRs to weed out potentially unsafe contractors during the bid process.
Every company's workers' comp loss reports are submitted to a rating bureau and each employer's losses are compared to what is expected for that type of business, based on the reported payrolls. So, if you're an electrician, you are compared with other electricians of a similar size.
A "mod" calculation gives more weight to the frequency of injuries, but does not overly penalize a company for the severity of one particular claim. Every company starts with a "mod" of 1.00, which then is adjusted depending on whether the company's losses are better or worse than average. The goal is to have a "credit modifier," which means your EMR is less than 1.00. A higher EMR is known as a "debit modifier."
Obviously, you can affect your "mod" by reducing losses. But it's also possible to improve your EMR by simply reviewing what information is being submitted to the rating bureau and making corrections where warranted.
Look for Red Flags
Each year, your insurer sends your loss information to the rating bureau on something called a "unit stat card." You should take ownership for the information on that card because the EMR that results from it is so important to your business. If your agent can't provide the actual card, he or she will give you the information that makes up the unit stat card. Before the card is submitted to the rating bureau, you should examine it with an eye toward these potential red flags:
- "Placeholder" reserves-When you report a claim, it is recorded on your card even if there is no injury and nothing ultimately is paid. Sometimes, when the claim is recorded, an insurer will enter a reserve amount in anticipation of a future settlement. You need to ensure that claims with no dollar loss are accurately recorded as such.
- Incorrect payroll coding-If a carpenter's salary is coded as a clerical salary by mistake, for example, there's a good chance that your losses will appear to be above average. That's because it's assumed a clerical person will generate fewer losses than a carpenter. You could be assigned a debit modifier simply because your expected losses were underestimated due to coding error.
- Premiums paid-Your unit stat card will show the premium your company is paying. If the premium amount recorded is less than what you actually are paying, then your expected losses probably are lower than your actual losses, and you'll have a debit modifier. So, make sure every nickel you've paid is on there because that will help you.
- Subrogation-When insurers sue third parties to recover amounts paid to or on behalf of their policyholders, that's called subrogation. For instance, suppose a painter fell off a defective ladder and the insurer paid $50,000 for the loss. If the insurer sued the ladder manufacturer and recovered $40,000, your card should reflect only the $10,000 difference. If the entire $50,000 is recorded instead, you'll pay extra for the oversight.
Test Different Scenarios
Working with your agent, you also can use the unit stat card to analyze a variety of circumstances to see how they would impact your mod and, thus, your premiums. For instance, you could pull out all claims of less than $500 to see how self-insuring those small losses would reduce your premium. Or, you could determine how changing your business focus-such as avoiding certain jobs and the losses they generate-would improve your EMR. Conducting these and similar test modifiers in advance of receiving your final modifier can be truly enlightening.
You also can project how potential changes in ownership might alter your mod. In construction, small companies sometimes go in and out of business several times. There are mergers, acquisitions and joint ventures, and any of these moves can affect your mods.
Generally, a company with new ownership will be assigned a mod of 1.00 unless the new owner's experience is considered, which sometimes is done and sometimes not. If you're considering such a transaction and have a debit modifier, it could work to your advantage. Likewise, if you have a credit modifier, a change in ownership could raise your mod. It's not likely that you'd consider a change in ownership simply to lower your insurance costs, but it is helpful to understand how such an event would influence your rates.
No Magic Bullet
Just as there is no miracle weight loss solution, there is also no easy way to manage your insurance dollars. But if you have the desire to make a difference, there are many actions that, if taken together, can truly reduce your premiums and make you more attractive to insurers.
Don't kid yourself-it's important to be a desirable client. You want insurance companies to fight for your business. You also want to be in a position to select the insurer you covet-a provider that understands your business; that will partner with you to improve safety; that will stand up to fraudulent claims; and that will work hard to keep your insurance costs down.
Construction Business Owner, August 2006
The purpose of this article is to provide information, rather than advice or opinion. It is accurate to the best of the author's knowledge as of the date of the publication. Accordingly, this article should not be viewed as a substitute for the guidance and recommendations of a retained professional. To the extent this article contains any descriptions of CNA products, please note that all products may not be available in all states. Actual terms, coverages, amounts, conditions and exclusions are governed and controlled by the terms and conditions of the relevant insurance policies.
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