Past-Present-Future: The Actual Impact of Claims Costs on Workers’ Compensation Premiums

A common scenario when we at Aurenda first meet a prospective client is that a poor claims history has led to a whopping increase in the organisation’s workers’ compensation premium. Sure, the immediate consequences of a poor year are often apparent in the direct increase in premium – but have you considered the past and future cost implications as well?

Past

Contrary to popular belief, it only takes one bad year of workers’ compensation costs to have an impact on your workers’ compensation premium, particularly in a hardening insurance market.

  • Higher workers’ compensation costs can be attributed to one or many variables, including:
  • Increase in the frequency and/or severity of injuries
  • Increase in the number of claims as a result of changing business conditions
  • Lack of control over the injury and claims management process
  • Lack of internal responsibility and/or accountability for managing and supervising the recovery of injured workers
  • Failure to provide suitable/ alternate duties in every instance
  • Lack of understanding of the implications of poor injury management
  • Poor communication between the injured worker, employer, medical treatment providers and insurer
  • Poor organisational morale
  • A single claim that blows out because of severity of injury and/or complexity of the issues surrounding the claim

Whilst the primary concern with a premium increase is centred on the immediate financial impact on the bottom line of the organisation, there are very good reasons to remain focussed on the past.

  1. Is there a Claims Experience Discount (CED) for the previous policy period?CEDs can be worth as much as 25% of premium – do you know what your CED is worth? CEDs are paid on a sliding scale – what are the minimum and maximum thresholds for achieving all or part of the CED on the previous policy period? Depending on the actual severity of claims in the previous period, and ratio of paid costs to outstanding estimates, you may still be in a position to obtain some CED from your previous premium at the next insurance renewal.
  2. Future premiums will be calculated on the basis of past claims history.Workers’ compensation is a long-tail insurance product so you need to continue to manage all open claims to achieve the best possible outcome for both the injured worker and your future premium. Outstanding estimates are just that: “estimates”. Anything that can be done to get a better ‘picture’ of the final outcome of the claim in terms of actual paid costs will assist your broker to negotiate the next premium. Finalisation of outstanding claims is obviously the goal, but other strategies can also result in far lower estimates for claims that will remain open over a longer period.

Present

As Tony Robbins says, “If you do what you’ve always done, you’ll get what you’ve always gotten”. Now that you’ve absorbed a massive hit to your premium, what are you going to do about it?

Understanding the reasons for the escalation in claims costs is a good starting point. They could be the consequence of one or many of the reasons outlined above. A note of caution: don’t lay (all) the blame on third parties. The Western Australian workers’ compensation system allows for an incredible amount of employer input and direction into the management of workplace injuries and claims. If, as a business, you are not aware of this or you are not exercising your rights and responsibilities in this area, then you need to understand what they are and how to use them to reduce claims costs – and achieve better outcomes for your injured employees.

In addition, there’s the potential CED on the new premium – likely to be worth much more than last year, now that your premium has increased. Do you know what the financial targets are to achieve the CED? What strategies will you put in place to do something different this year?

Future

Future premiums are affected by past and present claims costs – pure and simple. You may be reeling from a premium increase right now, but if you do nothing to change how you control claims costs going forward, you haven’t seen the worst of it. It can take up to five years of good claims history to counter the impact of one bad year on premiums.

Not only will you face an immediate increase in premium, but the recurring impact means that you may be paying the price for years to come – even without consideration for increases due to the growth of the business.

Of course, the greater the impact you make on reducing claims costs immediately, the lower the potential long-term recurring impact on premiums.

What Now?

Consider the scenario of a company with a gazetted premium rate equating to $250,000. With a 50% loading due to a poor claims history, the actual premium cost is $375,000 in the first year. Assuming that it takes this company five years to get back to their Gazette Rate, the total additional premium paid over that period is $375,000. What could you do with that money?

There are three key factors to address the impact of claims costs on premiums:

  1. Understand which drivers are determining your claims costs – it may be any or all of those outlined above.
  2. Implement specific strategies to counter the individual cost drivers that are impacting your business.
  3. Establish financial targets to reduce claims costs and achieve CEDs – and monitor these targets in conjunction with the people who have responsibility for injury management in your workplace.

As Einstein said, “Insanity is doing the same thing, over and over again, but expecting different results”. Contact Deb Macksy at Aurenda on (08) 6389 8900 or email dmacksy@aurenda.com to discuss how Aurenda can assist you to stop the insanity.

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Filed under Aurenda, Insurance premiums, Workers Compensation

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