These may also be known as Class Codes, Work Comp Codes, Codes, etc. Today, let us start with the definition of the Class Codes.

As I mentioned in my last post, the errors that we find have a common theme to them, which are Classification Codes. In laypersons terms, Classification Codes are how a Workers Comp carrier and the NCCI or your state rating bureau views your business operation. For instance, a trucking company may have a Classification Code of 7228 - which are short haul truckers.

There is a very important point that needs to be made now. Your Classification Codes are not the same as your SIC codes. Your Work Comp Class Codes should not be based on your SIC codes. Quite often very small employers start out by doing a self-audit on their payroll and job types. When they grow, the Class Codes that are used year after year may have been based on the owner's self-audit and description of company.

This is not to say that the insured, NCCI, agent, or insurance carrier did anything wrong. Quite often, the Classification Codes are just copied from year to year by the agent. What if you change course in what your business is doing, or if the NCCI or your state rating bureau performs an in-person audit? I am not talking about the premium auditor that does a yearly payroll audit. Do your Classification Codes have quite a few NOC's (Not Otherwise Classified)?

A great example is a firefighting company that we assisted that was classified as a water carrier. Why? They had Water in their name. As they were a small company, they were audited over the phone year after year. The firefighters now pay over 60% less in Workers' Compensation premiums after we were able to convince the State Rating Bureau and their insurance carrier of the mistake. Who was to blame? This was just the natural Work Comp insurance process that went slightly awry.

Tomorrow - Classification Codes Part I

We have examined a large number of Workers Comp policies in our existence. We find errors at least 50% of the time. The most common errors that we have seen are (in order from most common to least):

• Over-reserving or not closing files timely (see previous post on Total Incurred)
• Employees misclassified into the wrong classification code
• Governing classification code wrong - very expensive
• Subcontractors classified as employees
• Wrong payroll items counted as Workers Comp remuneration
• Two or more distinct businesses classified as one business

When you look at your Workers Comp insurance policies and loss runs, please remember that there are 130 variables that go into a claim, and there are 34 steps to taking the Total Incurred and converting them into your E-Mod or X-Mod. Then, there are approximately 1o more steps once you have your Experience Mod to calculating your premium. As each of the variables feed into each other, you can multiply them to see what a chance of error would be for a given Work Comp policy.

130 * 34 * 10 = 44,200

Hold on, though as that is for one claim figuring into your premium. If you have 20 open claims, then you would multiply 44,200 * 20 = 884,000 So, there are 884,000 calculations or variables that must all be correct for you to pay your correct premium. Are you still willing to just write a check to the Workers Compensation insurance carrier?

I wrote about the Self-Insured Phenomenon yesterday. At this point, if you are self-insured, are you thinking that you're OUT of this type of system? The actuary that sets your LDF's or Loss Development Factors has as many variables and combos to examine. If you are self-insured, then the number of open claims may possibly be even higher.

I will talk about each of the above errors over the next few days. Notice how many times the word Classification is in the above list.

When I write articles, manuals, or do presentations, there was an area that I used to not cover as well as it should have been covered. That is Self-Insurance.

I coined the term "Self-Insurance Phenomenon" after hearing these comments and auditing self-insured files for private companies and governmental entities. This is one area that I have become concerned about in the past few years.

A large percentage of our clients that are self-insured and have TPA’s (Third Party Administrators) handling the claims seem to think that they have found some sort of safety net vs. using traditional insurance polices. The expression “We are with a TPA, so we are not really paying insurance premiums” is one of the phrases that employers have said to our company personnel often. This is a grave mistake, as the TPA is spending directly from the employer's budget, sometimes without enough oversight.

TPA’s also charge a fixed amount per year to handle the claims that must be in the calculations to compare TPA vs. Non-TPA insurance decisions. Under audit, we have found very poor claim handling from TPA’s that are not usually found in the general WC claims environment. This is not to say that all TPA's are bad. Reviewing the claim payouts very often is recommended.

A twist of the same type of thinking is "We have a large deductible, so the insurance carrier only pays after the claims reaches a certain level of $." The insurance carrier still reports your claims to NCCI under a large deductible. As far as NCCI is concerned, you are not self-insured when you are in a large deductible program.

Another comment we often hear from self-insureds is, "we only pay the TPA $X per claim per year to handle our claims." As covered in my upcoming manual -there are many charges that a TPA adds in that regular insurance carriers cover in their premiums charged. We have seen the extra charges to be up to 5,000% of $X.

Question in response to yesterday's post - You had said there are no guidelines for a Workers Compensation Adjuster to set the Workers Comp reserves on a file - How about the automated reserving programs that are available? Do they work, and are they accurate?

Answer - I have seen some of them, and audited files, where automatic reserves are set. They are no more accurate than the adjuster setting file reserves on their own. A great example is when we audited files for an Ohio client. Ohio is monopolistic. At the time, they were using an automated reserve system. The reserves/Total Incurred for the files were not that accurate. One of the reasons is the adjuster needs to update what is going on in the claim just as if the carrier was non-automated on reserves. The bottom line is the employer was still paying the same premium regardless.

The reason? - There are over 130 variables that go into a Workers Compensation reserve. The software is only taking what it is given, so the reserves are only as accurate as what the adjuster inputs into them. BTW, the BWC of Ohio (Government-ran monopolistic Workers Comp Carrier) is and has been under investigation. What was one of the complaints? -inaccurate file reserves.

Who is in charge of your Workers Compensation budget that is 100% unregulated? Is it your agent, underwriter, premium auditor, or insurance commissioner? No, not any one of those parties, as they are all under some type of regulation.

The unregulated part of Workers' Comp premiums is (drum roll) - your Work Comp insurance adjuster. There is a long previous posting on Total Incurred. To not bore any one to tears, I left this part for today.

Your insurance adjuster needs to be licensed in most states, but there is no regulation on the reserves/total incurred they set on your WC claims. What are the guidelines for setting reserves on a WC claim? There are none. As I mentioned in the last post, whatever your total incurred is by the 180th day after your policy period expires is what you pay for your Workers Compensation premiums - plain and simple.

What do you do immediately to make sure you have no overcharges in your premiums?

1. Find your monthly or quarterly Workers Comp Loss Run from your insurance carrier and review it.
2. If you do not have one, request it ASAP.
3. Make sure that all claims that should be closed are closed.
4. If a total incurred or reserves look very large for the claim, email your adjuster.
5. Do you know who the adjuster is on every one of your claims?
6. Do you have a working relationship with that adjuster?
7. Do you have their email address?
8. If you feel you need further help, consult with a claims expert- we are claims and premium consultants. Please excuse the J&L Risk Mgmt ad.

If you answered No to #4 - #6, are you just writing checks to the agent or carrier? There is no need to just think of Workers' Compensation as a fixed cost to doing business. There are more areas to reduce your premium, but this is the one that costs your company the most!

***Please note that any of the terms in this post or others can be found at http://www.cutcompcosts.com/ under the Definitions tab.

Experience Modification Factor

As I mentioned in a prior post, your Work Comp premium calculations include 34 steps. However, those are the steps just to calculate your Experience Modification factor, also referred to as an E-Mod or an X-Mod.

To make a very long story short, there are four main elements that determine your E-Mod:

• total incurred
• claim frequency
• classification codes
• amount of payroll per classification code

The payrolls per classification code are the basis for what is referred to as "Expected Losses"

Why was the Total Incurred from the last post so important? The Expected Losses are divided by the "Actual Losses" to calculate your E-Mod. Actual Losses are derived from the claims' total incurred. The lower the total incurred is, the lower your actual losses. The lower your actual losses, the lower the E-Mod.

An E-mod is calculated on the total incurred SIX months after the close of the policy period. If you have a January 1st renewal date, the State Rating Bureau or the NCCI will calculate your E-mod on 7/1. How can you be charged for premiums six months after your policy has ended? Actually, you aren't, as Workers' Compensation runs one year behind.

If your renewal is 1/1/08, your Experience Period is from 4/1/03 through 12/31/06. Any policies that started 4/1/03 and ended by 12/31/06 will have an effect on your 1/1/08 renewal for your 1/1/08 - 1/1/09 policy period. The Experience Period runs out on 6/30/07 at the close of the business day. If the reserves/total incurred are reduced by $1,000,000 on 7/1, that big chunk of $ will still show up on your E-Mod and eventually your premiums, even though it was reduced the next day.

I know this info is about exciting as watching grass grow, but it is cold hard cash we are talking about with your premiums. We will come back to the Experience Mod later. Whew! That was enough numbers for anyone to have to look at for some time.

Coming up next week:

• Monday - The Unregulated Part of Your Work Comp Insurance Premium - you and the government/Department of Insurance have no control over it, and it can kill your insurance budget. Only one person has control, and it is not your Workers Comp insurance agent.
• Tuesday - The Self-Insurance Phenomenon - shocking but true.
• Wednesday - The Main Errors We Find When Auditing Workers' Compensation Policies

Your premiums are calculated from a formula that has no less than 34 steps to it. Let's first look at what is the driving force behind what you pay in Work Comp premiums. The reserves, better known as total incurred on the file, is the catalyst of the whole process. As I have said many times before, WHAT YOU PAY IN PREMIUMS HAS NOTHING TO DO WITH WHAT IS PAID OUT ON THE WORKERS COMPENSATION FILE.

The reserves are what the adjuster thinks you will pay out on the file for the life of the claim. As you read this, do you know what the total incurred is for each of your Workers Compensation files? If not, you may be in for a real shocker. Immediately ask for your loss runs from your insurance carrier that show all of the files that are open. Review them closely to see what you are paying for in your premiums.

If the total incurred for a file looks high to you, ask the adjuster to explain their reserves.If you feel like you need help with the loss runs, consult a Workers Comp claims consultant as soon as possible. Remember, you are charged for THREE years for the total incurred on a claim.Tomorrow - More on the Premium Calculation

The mainstay of all my presentations is the (used to be three) "Five Keys to Saving on Workers' Compensation Costs." This is a time-tested list that will reduce Workers' Comp costs for any employer in any jurisdiction. These come from over 20 years of analyzing claim costs, and a study that I performed with over 7,000 Workers' Compensation files. They are:

1. Timely Filing of the First Report of Injury - within 24 hours


2. Physician's Network - where does the employee treat?


3. Return to Work Program - prevents large cases


4. Employee Treatment by Employer, Doctor, Adjuster - reduces malingering and fraud


5. Making Workers' Comp a Priority - do you just write a check to the TPA or carrier?

I found that in a study of the 7,000 Workers' Compensation files, that if an employer does not do just one of #'s 1 - 4, the claim cost will increase by 400%. And yes, if none of the first three are done properly the employer will pay 1,200% more than a similar employer that is attending to all of the first three of the five.

I will cover all of them individually through the next five weeks. I will be releasing a manual in the next month that goes even deeper into detail.

Tomorrow - How is Your Workers' Compensation Premium Calculated?

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So, we are off and running on the blog postings. What I want to do with this blog is to talk about how to save $ on Workers' Compensation premiums plain and simple. We do not sell any type of insurance. We would consider it a conflict of interest to be consultants on WC and then sell policies.

Our main page is http://www.cutcompcosts.com/ We have a large list of Workers Comp definitions under the tab Definitions. You may want to download those for a great reference when speaking to anyone about Work Comp, especially when you are receiving policy quotes.

I will try to give premium saving tips from the claims handling and the underwriting areas. I will try to post something on WC every day before I shut down my trusty laptop. As I read at least 10 Workers' Compensation publications a day, I should be able to pass along some tidbits of useful info.

If you wish to contact me, please see the Contact tab on our website. If you want to see a certain subject on Workers Compensation covered, please email me. If you have anything that you think should be posted, please email it to me. I will give you a full tag line of credit, if published.