Hope for Workers' Compensation Claims

26 January 2016

Hope for Workers’ Compensation Claims

A Workers’ Compensation claim that occurs today can affect future premiums for the next 4 to 5 years. This is incredibly frustrating for employers of all shapes, sizes and industries. Add this to the volatility of the Workers’ Compensation marketplace, especially here in California, and future premiums become unpredictable – and can be downright painful!

I witnessed one of the worst examples of claims, timing and a hardening marketplace early in my career. I called on a second generation lumber dealer in Southern California. They had serious claims problems, but didn’t pay too much attention to them as their premium was downright cheap.

That was until the market turned and everything changed.

Their $99,000 premium turned into $400,000 the next year and then $800,000 the following year (with a large deductible!). Keep in mind, their business did not grow during this time and it just about put them out of business!

I realize this is an extreme example, but it is a real one. The huge premium increases were the symptoms of their problem, but not the problem.

The problem: They had way too many claims that could have been prevented, and there was no process to manage the claims once they occurred leading to hemorrhaging costs.

They had way too many claims that could have been prevented, and there was no process to manage the claims once they occurred leading to hemorrhaging costs.

Now their financial health took a beating due to these premium increases, but it was only part of the equation. The other part was the internal costs to the business.

Outside of the huge premiums, their financials were hit by Loss Costs both Direct (deductibles, damage to equipment and regulatory fines) and Indirect (productivity, administrative time, turnover, overtime costs and brand reputation).

These Loss Costs reduced their profitability, EBITDA, shareholder value and ability to spur growth through the inability to purchase new machinery and equipment.

To bring it home let’s do some simple math. Let’s say they incurred $1,000,000 in claims and during that time did $100,000,000 in sales at a 2 percent net profit margin. Their profit was $2,000,000, but should have been $3,000,000!

How so?

Their internal Loss Costs (using a 1.0 factor of claims) ate up $1,000,000 or 50 percent of their net profits – and this had nothing to do with premium increases!

Do I have your attention now? I hope so.

So, why am I telling you this painful story?  To give you Hope. Yes, that’s right, Hope!

Here’s what you don’t have control over: the insurance marketplace or future insurance premiums.

Here’s what you do have control over: claims – by implementing effective loss prevention and claims management strategies.

Here is the Hope: Reducing losses will reduce Loss Costs which will have an immediate impact to the financials of your organization. Thanks to new technology this can be tracked and quantified.

The good news is you don’t need to wait until your renewal or change insurance carriers to do this do this. You can start having an impact now!  All you need is a broker that understands this and has the resources to achieve your goals.

 

 

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