Gary Gokey, CSP, ARM
Loss Control, Safety Management Group
Most people have a pretty good understanding of the basic concept of insurance. Everyone contributes a relatively small amount to a risk pool, so that a larger amount is available when they face a loss.
On the other hand, how insurance companies determine the premiums they charge is quite complex and confusing ' and workers compensation policies are probably among the most difficult to decipher. When insurers determine premium amounts for workers comp policies using a retro plan, they factor in a mysterious multiplier called the Experience Modification Rate. Known as an EMR, that multiplier can either make your rate sky-high or downright affordable ' and you may have more control over it than you realize.
Explaining EMR requires some understanding of how workers comp rates are computed. In simple terms, the base (or 'manual') premium is computed by dividing a company's payroll in a given job classification by 100, and then by a 'class rate' determined by the National Council on Compensation Insurance (NCCI) that reflects the inherent risk in that job classification. For example, structural ironworkers have an inherently higher risk of injury than receptionists, so their class rate is significantly higher.
The insurer next looks at your company's past claims history to see how your claims compare to those of similar companies in your industry. After all, if you've had a higher-than-normal rate of injuries in the past, it's reasonable to assume that your rate will continue to be higher in the future. Specifically, insurers examine your history for the three full years ending one year before your current policy expires. For example, if you're getting a quote for coverage that expires on January 5, 2008, the retro plan will look at 2004, 2005 and 2006.
NCCI has developed a complicated formula that considers the ratio between expected losses in your industry and what your company actually incurred, as well as both the frequency of losses and the severity of those losses. A company with one big loss is going to be 'penalized' less severely than a company with many smaller losses, because having many small losses is seen as a sign that you'll face larger ones in the future.
The result of that formula is your EMR, which is then multiplied against the manual premium rate to determine your actual premium (before any special discounts or credits from your insurer). Essentially, if your EMR is higher than 1.00, your premium will be higher than average; if it's 0.99 or lower, your premium will be less.
The toughest part of dealing with EMR is that it carries any negative claims history for three years. You may have had a great claims history for a decade, but suffered a couple bad accidents during 2006. Even if your company has been accident-free since then, those claims will be reflected in your EMR as you negotiate policies through 2010.
But I mentioned that you may be able to exert some control over your company's EMR. How you respond to injuries suffered by your workers can have a significant impact.
As an example, I noted that multiple small claims can be more damaging than one big claim. So you should analyze all of your claims to see why you have so many, and where they are occurring. It may be that workers are suffering small injuries because they're failing to wear the proper protective equipment for specific tasks. Those small injuries may not be life-threatening, but their cost will add up, so it's in your best interest to encourage safety compliance.
Rushing all injured employees to hospital emergency rooms may not be in your best interest, either. Many companies will negotiate agreements with local care providers such as occupational care centers. In return for a promise to have all employees with non-life-threatening work-related injuries treated there, you may be able to negotiate a smaller per-visit fee. If your jobsite is large enough, it may pay to have an on-site clinic staffed by a nurse and/or part-time doctors, because your insurance (and downtime) savings may outweigh the payroll costs.
Another key factor is reducing the time employees miss because of injury. Typically, if the doctor tells the employee that he cannot perform a work-related activity for a certain time (such as no lifting for ten days), many employers will send the employee home for the duration. Instead, why not assign him to some sort of lighter duty at the jobsite' That way, the employee isn't sitting around the house, and your EMR will take much less of a hit.
Finally, you can also impact your EMR by having deductibles on your policy. Paying small claims out-of-pocket will keep them from showing up in the history when the insurer reviews it ' just like handling a small auto body repair on your own keeps it from increasing the cost of your auto insurance. However, make the insurer aware that you took that step, in the event any complications arise. In addition, you may also need to report the injury directly to the state if you're not going through your carrier.
Understanding EMR and taking an active role in managing the factors involved in its computation takes some effort, but the payoff can be significant.
About The Author
Gary H. Gokey, CSP, ARM (email) is a safety advisor at Safety Management Group in Indianapolis, Indiana. He holds a Certified Safety Professional (CSP) designation along with an Associate in Risk Management (ARM) certificate. Gary's experience includes 24 years of risk/loss prevention services in the insurance industry.