The entity or person named first on the dec page of the policy. The first named insured or primary has certain rights or responsibilities that are not afforded to the other additional insureds on the policy. Some examples of these rights would be return premium and receipt of cancellation notices. The responsibilities include premium payment and compliance with loss notice requirements.

Allocated Loss Adjustment Expense better known as ALAE. In Workers Compensation, there are three areas of reserves and loss payments. They are indemnity, medical, and ALAE.


There has been much discussion about some of the ALAE being added to the medical reserves by the insurance claims staff. Charges such as rehabilitation nurses, medical bill review, PPO network, etc. are not consistently charged to the right area by the carrier or TPA.


ALAE for Workers Comp usually includes defense attorneys, Private Investigators or any type of outside services that aids in the investigation of or reduction of losses.

The insurer retains all the claims handling responsibilities regardless of the size of the plan. There are two main categories in Workers Compensation:

• Small deductible - the employer retains a small amount of each claim paid, for example $250. I have not seen small deductibles that were successful in reducing premiums for employers.
• Large deductible - the employer will be directly responsible for claims payments up to a certain amount - usually $250,000. The carrier will then be responsible for any amounts over $250,000.

Facilities that are state owned and operated that directly compete with commercial carriers. The competitive state funds usually only write Workers' Comp policies that are specific to that state. Not all states participate in this type of fund.

The states with Competitive State Funds are Arizona, California, Hawaii, Idaho, Kentucky, Louisiana, Maine, Missouri, Maryland, Minnesota, Montana, New Mexico, New York, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, and Utah.

West Virginia had used Brickstreet as a competitive state fund until recently.

A temporary but legal agreement that provides proof of coverage until a policy can be issued. Provided by agents or carriers, binders should clearly define the terms of the policy that will be issued. These terms of coverage should include time limits, type of policy, the name of the insurer, the name of the insured, and the cost of the insurance and all other information that may be used as proof of insurance.

The post title has hit the Workers Comp airwaves after the President of Liberty Mutual had made it at a recent presentation. I often do not necessarily agree with Liberty Mutual. However, in this case, I think the assertion is highly accurate.

The combined ratio for the Workers Comp market is 119%. That means that when a carrier writes Workers Comp coverage it is at a loss. I have often commented in my presentations that Workers Comp carriers were writing low premiums and taking huge losses as they could recover it in the stock and bond markets. Now, they must invest it in fixed investments. Does this sound like a hard market is approaching?

A hard market is basically when carriers become very strict in their underwriting procedures. According to the old supply and demand model, if supply is cut and the demand is still strong, prices must increase to keep the market stable. If carriers become much more stringent, then employers with E-Mods of 1.2 and above will likely end up in risk pools/state funds which charge up to 400% more for the same coverage.

The telling statistic is as follows - according to the Wall Street Journal, John Doyle, the president and CEO of American International Group Inc.'s (AIG) U.S. property-casualty operations, said his unit had cut back on how much workers' compensation coverage it sells. It now has annual premiums of about $800 million, compared with $3 billion in 2007.

So the largest writer of Workers Comp is now highly concerned about a hard market and one of the major writers of Workers Comp just cut their writing by 74%......Tick Tick Tick.

I have posted on this subject often such as this article. Workers Comp subrogation seems to be one of those subjects that is passed over often. Self insureds need to be vigilant in this area as this is $$$ that can be directly assessed back to a file or files. There are two areas of even greater concern for Workers Comp policyholders.

They are:

• Were the funds recovered actually credited back to the individual file?
• Once credited, was the file correction reported to the Rating Bureaus (State Rating Bureau or NCCI) timely?

We have seen in our premium audits for employers or file reviews that there sometimes may not be a solid mechanism to have the funds credited back to the individual file timely. All Workers Comp insurance carriers do have your company's best interest at heart when crediting the Workers Comp file with subrogation funds recovered. We sometimes find the funds credited back to the employer in general, not to the individual file. It is critical that the subrogation funds are credited to the individual file.

The file reserves must be reported back to the Rating Bureau immediately, not at the next Unistat date. See this article for the Unistat Date explanation. Why is this so important? Workers Comp E-Mods and X-Mods are calculated after your policy inception date for the next policy period. In other words, everything is on a time clock. Sometimes even a few days of not reporting the subrogation recovery to the rating bureaus can cost your company dearly.

If your company wishes, you may want to contact the Rating Bureau a few days after your carrier recovers the funds to make sure the corrected amount was reported. This seems to be where the breakdown occurs in getting the recovered funds back into your E-Mod. Each state has their own rules on reporting any changes to a Workers Comp file that has already been reported to the Rating Bureau.

I will post more on this subject next time. Remember - subrogation never really existed unless the Rating Bureau knows about it.

Errors and Omissions Insurance is professional liability insurance that protects professional insurance agents from claims arising from the sale and servicing of insurance products. Agents' E&O is a very important coverage as an agent sometimes has millions of dollars of exposure in just one transaction.

Once again, California's Insurance Commissioner has rejected the 27.7% recommended rate increase by the California's Workers Compensation Rating Bureau (WCIRB). I had thought the requested rate increase was somewhat steep. However, a 0% rate increase may not be the answer either.

The Workers Comp insurance carriers can increase or decrease any of their rates as they see fit using their own underwriting data. I have rarely seen where the Insurance Commissioner or Rating Bureau had ever rejected the rates set by the insurance carrier.

Is the Workers Compensation insurance rating system for California or any state harmed when the Rating Bureau's recommended rates are rejected? That is a tough question to ask. If the recommended rate increases by the rating bureau are not that sharp, then I do not see it as a problem. California's WCIRB has recommend 20% rate increases often over the last few years and have been rejected.

I think the carriers have amassed a large amount of underwriting data. Therefore, they know the correct rates to charge for Workers Compensation coverage to their insureds. As the rates are usually "rubber stamped" by the Rating Bureau and Insurance Commissioner, let the market reflect the Workers Compensation environment, not vice versa.

One of the most common additional insureds is a subcontractor. The subcontractor may not have the proper insurance. The main contractor may choose to cover the subcontractor by an endorsement.

An individual or entity that is not automatically included as an insured under the policy of another, but for whom the named insured's policy provides a certain degree of protection. An endorsement is typically required to effect additional insured status.

Interstate rating is an experience modification factor across more than one state. These ratings are calculated by the NCCI for employers whose previous workers compensation policies have included payroll for more than one state. While most states recognize the interstate rating system, a few states do not participate. In these stand alone states, employers have a separate modifier for the payroll in generated in their state calculated by their own state rating bureau.

I was going to construct a chart on when your company's Workers Comp reserve reduction program would need to begin overall. I think that a formula would be easier. For a quick date calculator, try this one.

There are two assumptions that have to be made for the formula to work.

• Your company pays a premium and is not self insured
• You have a normal Workers Comp policy

Policy Renewal Date + 3 months = Latest time that a Workers Comp reserve reduction program should be undertaken.

Policy Renewal Date + 6 months = Unistat date

The Unistat date is the date that no matter what happens, your Workers Comp reserves are pegged to calculate your NEXT year's policy. I am giving you three months to do a complete Workers Comp reserve reduction program. You may wish to start slightly earlier.

You may want to start even earlier if you do not have online and immediate access to your Workers Comp files and reserves. That is why I consider online access to be golden. It saves an enormous amount of time. I have written about it in the past.

The claims staff is just not going to lower your reserves because you call. The largest mistake made when it comes time for a reserve reduction is to just simply call up the adjuster and say my reserves are too high, take them down ASAP.

An actuary's ability to project Workers Compensation reserves or pricing in the future is based upon numerous inputs. One of those inputs is the amount of time covered by the data. If the actuary has 10 years of data, he/she will be more able to accurately predict future losses than with two or three.

The largest number of Workers Comp policies will renew 1/1/11. Long ago, when I was an Workers Comp adjuster, I used to be guilty of causing employers to use up time they could have been using more efficiently elsewhere. If this happens to you, stop it in its tracks.

Agents, adjusters and other Workers Comp personnel seem to want to hold these big meetings the month before the expiration of your Workers Comp policies. These grandiose meetings center around your Workers Comp reserves. Show them the door as the December reserves have nothing to do with your Workers Comp E-Mods. I have written very often about the Unistat date.

Your Workers Comp E-Mod reduction program will need to start three months AFTER your policy renews - not in December. Starting sometime in March would be the best timing. This effort, of course, is for your next year's E-Mod.

I will construct a mini-chart in my next post on when to start your Workers Comp reserve reduction program. Take a close look at it. This will be a great December as you will not need to review your Workers Comp reserves at the last minute.

The number of monopolistic state funds have dwindled due to states such as Nevada and West Virginia converting to a free market system. In a monopolistic state for Workers Compensation the law requires that companies in that state purchase workers compensation coverage from the government. Private insurers cannot write policies in these states.

North Dakota, Ohio, Washington, and Wyoming are the last of the monopolistic state funds in existence. Monopolistic state funds are not to be confused with competitive state funds such as SCIF in CA.

J&L Risk Management Consultants, Inc. is proud to introduce our newly developed CompScreen Safety Program (c). Because it is now more important than ever for businesses to reduce their Workers Compensation premiums, it is prime time for J&L to offer this new service. Their CompScreen will enable businesses, through time proven practices, to effectively reduce insurance cost. J&L will add Safety Managers and Risk Managers to its’ already expert staff.

The quickest way to reduce the E-Mod is most definitely your safety program. Keeping your employees out of the claims system will drop E-Mods like a rock if done properly.. The very basic E-Mod or X-Mod equation is adjusted actual losses / adjusted expected losses. The expected losses are derived from your company's payroll size and classification codes. The idea is to keep the top number in the equation (numerator) as small as possible.

I will post more updates on our new program's progression.

Qualitative Claim Auditing refers to a review of claim files to explore the level of claims handling adequacy. The best way to accomplish a qualitative audit is by comparing the file handling to the claims manual using a scoring sheet. A qualitative claim audit can be performed internally or by an outside auditor and can be invaluable in helping to cut costs and improve efficiency in a claims office.

A seasonal risk for Workers Compensation is when the workers are hired to work only certain times of the year. Holiday department store workers are seen as a seasonal risk business as are fruit harvesters.

A firm hired to handle Workers Compensation claims by contract. Third Party Administrators (TPA) usually work for self insureds on a yearly renewable basis.

TPA's usually are paid so much per incoming medical only, lost time, or reportable only claim. The TPA fee for incoming claims is usually a flat fee. A TPA will also usually handle the older claims and the claims from the prior TPA for a certain amount of fees - usually called "tail claims."

A TPA differs from an insurance carrier in that no premiums are charged and the funds are spent directly from their clients' budgets.

As the economy has tanked, companies such as yours are looking for ways to save on Workers Comp more than ever. I have seen many blog posts and heard many discussions where everyone equates safety and the E-Mod. However, there are discounts or debits that can sway your Workers Comp premiums up to 50% (+25% or -25%).

The discount or debit (egad!) can be up to 25% and is directly related into your safety program. Instead of making up a simulated schedule, I will use the state of Pennsylvania's schedule of debits and credits. I have noticed that the Scheduled Debits and Credits are almost the same for each state.

Many Risk Managers and Safety Personnel Departments are being scaled back in this economy. Look below to see what safety and Risk Management can bring to the table, so to speak. Safety and Risk Management may help your company's E-Mod, but there is also a possible 50% swing in your Workers Comp budget. As they say, the proof is in the pudding. Please refer to the pudding below. I highlighted a few things in the schedule.

SCHEDULE RATING

The loss/or expense components of insured risk's premium may, at the option of the underwriting carrier, be adjusted in accordance with the provisions of schedule rating to reflect defined characteristics of the risk which, in the sole judgment of the underwriting carrier, are not adequately reflected in prior experience of the insured risk.

At the option of the underwriting carrier this plan may be applied to any risk regardless of premium size.

All statistical reporting requirements of the Bureau and the Pennsylvania Insurance Department, including provisions of the Statistical Plan Manual, Annual Calls for Financial Data Experience and Pennsylvania Schedule W, are applicable to business written in accordance with this plan and must be complied with by carriers using this plan.

Schedule rating credits or debits must be applied as a percentage factor to premium computed after experience modification (if the insured is eligible for experience rating) and before carrier premium discounts and expense constants if applicable.

Schedule rating adjustments for any given risk shall be based on information contained in the carrier's files and records when the credit or debit is determined, and such supporting information must be retained in the carrier's files and records for such risk throughout the period of time in which the policy is subject to audit under provisions of the policy.

Acceptance of a policy by an insured shall constitute agreement with the amount of schedule rating credit or debit, if applicable, or with the absence of any such credit or debit, if not applicable. Upon request of the insured a carrier shall make available documentation supporting the derivation of any proposed schedule rating credit or debit.

Upon request of the Pennsylvania Insurance Department or the Bureau a carrier shall make available documentation supporting the derivation of a schedule rating credit or debit for any specified risk or risks.

No schedule rating credit or debit may be effective prior to the underwriting insurer's receipt of information for a risk supporting the schedule rating credit or debit in question. No schedule rating credit or debit may be changed midterm without the mutual agreement of the insured risk and the underwriting carrier.

The following risk characteristics are eligible under this plan for assignment of credits or debits subject to the maximum ranges set forth below:

RISK CHARACTERISTIC	ALLOWABLE RANGE OF CREDITS OR DEBITS
Features of workplace maintenance or operation	-10% to +10%
Risk elements not addressed in the Classification Plan	-10% to +10%
Availability of medical facilities in or near workplace	-5% to +5%
Safety equipment/devices present in/missing from workplace	-5% to +5%
Extraordinary safety programs applicable to workplace	-5% to +5%
Qualifications of employees	-10% to +10%
Accommodations/cooperation with carrier by management	-5% to +5%
Considerations related to policy expenses	-5% to +5%
Other risk characteristics not addressed above (specified)	-10% to +10%

The maximum schedule rating credit permissible for any risk under this plan is - 25%.
The maximum schedule rating debit permissible for any risk under this plan is + 25%.

An Agent of Record (AOR) is an individual/legal entity having a properly executed contract with an insurance policy owner. The Agent of Record has a legal right to receiving commissions from the policy.

An AOR is authorized to represent an insured party in the purchase, servicing, and maintenance of insurance with a suitably designated insurer.

Insurance companies are very particular on disclosing any information or discuss an insured party's account with any agent other than the duly nominated AOR. An AOR nomination letter is the method used to change insurance agents.

Recently, the subject of E-Mod/X-Mods surfaced in a few publications and on some of the social networks that I participate on Workers Comp. There were many discussions and posts on what would be the fastest way to lower an E-Mod.

There are many publications on how to understand E-Mods. The best one that I have read is the free videos that are on NCCI's website under their education page. NCCI also has material that you can print that covers some of the areas of how E-Mods are calculated. The videos are not that long and are worth it if you are responsible for safety and risk management at your employer.

We have built up a large clientele from analyzing and projecting E-Mods for employers. There are a few techniques that can be attempted to lower on the E-Mod on the back-end such as checking for mistakes in the way the insurance company reported the claims data to NCCI or the State Rating Bureau . However, there is a more rapid E-Mod reduction technique.

The quickest way to reduce the E-Mod is most definitely your safety program. Keeping your employees out of the claims system will drop E-Mods like a rock if done properly. The very basic E-Mod or X-Mod equation is adjusted actual losses / adjusted expected losses. The expected losses are derived from your company's payroll size and classification codes. The idea is to keep the top number in the equation (numerator) as small as possible.

This post is getting a little long. I will pick the subject up again in my next post.

In the broadest sense, an underwriter is the person who "underwrites" his name to the conditions of the policy. In Workers Comp, an underwriter's job is to evaluate a given risk for plausibility and to determine the cost to insure that risk. An underwriter can also decline to cover an excessive risk. Underwriters typically work for insurance companies to arrange and authorize policies.

D Ratio is also known as the discount ratio. NCCI or your State Rating Bureau uses the D Ratio to determine the portion of the losses that are expected to be primary losses ($5,000 or less).

D Ratios vary by the rating state and the Workers Comp classification code. The D Ratio will appear as a two decimal figure on an employer's Experience Modification Rating Sheets. The D Ratio results from a series of actuarial calculations by NCCI or the State Rating Bureaus.

An agent is an insurance company's representative by way of agent-principal legal custom. The agent's primary alliance is with the insurance carrier, not the insurance buyer.

A broker has no allegiance to any insurance company or TPA under most circumstances. A broker generally has no contractual agreements with insurance carriers and relies on common or direct methods of perfecting business transactions with insurance carriers.

This can have a significant beneficial impact on insurance negotiations obtained through a broker.

A Certificate of Insurance is the document provided by the insurer with evidence that the employer has Workers Comp Insurance coverage for it's employees. The Certificate of Insurance will show the policy term and limits. It will also provide the carriers name and the insured's policy number. More often than not, a Certificate of Insurance is required by a contracting company before the insured, or contractor, is allowed to perform any tasks.

In my last blog post, I covered Protected Cell Captives under the Rent-A- Captive heading. I used to think this type of arrangement was complicated and expensive to administrate. I have found Protected Cell Captives to be neither complicated nor expensive when compared with paying regular Workers Comp premiums. Protected cell arrangements do not need to be a rent-a-captive only. They can be structured within any type of captive arrangement.

The two main benefits are that if any one cell files for bankruptcy, the other cells are not affected and can conduct business as usual. I had found the term "bankruptcy remote" to describe this type of capital safety. The other benefit is that if the capitalization of the cell is less expensive than without the cell, a profit-type motive exists.

I had actually been called in as an expert witness in a very complicated Workers Comp case where bad faith was an issue. The protected cell that covered the claim filed for bankruptcy and the attorney could not pursue any of the other cells due to the "bankruptcy remote" provision. This did not bode well for a very large Workers Comp file and the bad faith suit that was being pursued at the time.

In 2007, I became heavily involved with captives, but then did not pursue due to the fact that I had thought the IRS would strike down most captive arrangements for Workers Comp or any other type of coverage. The tax avoidance was something I thought would not be allowed. However, the IRS strikingly took the stance of the complete allowance of captives with a few caveats.

I will cover the IRS's most recent view of captives from the Enforcement Division. It is very interesting and does agree with the preservation of the tax benefits of captives.

In Workers Comp the term risk avoidance refers to one of the most obvious way to reduce risk to the economy of the business. Just as it sounds, avoid the occurrances in your daily business that have led to risk or claims that have happened in the past. Having a good safety program in place could avoid risk. Conscientious employees who have been well versed in safety practices is invaluable.

Rent-A-Captives are becoming more popular in Workers Comp as a method of risk transfer. Rent-A-Captives used to be viewed as hybrid arrangements that were too complicated to be considered by most employers. That landscape has changed in the current economy.

Individual Accounts
Rent-a-captives can benefit individual corporate accounts currently paying as little as $750,000 annually in casualty premiums. The rent-a-captive may serve as a reinsurer of the policy-issuing carrier or issue policies directly to the insured. The fronted structure can be guarantee cost or a retrospective rating plan. Some additional structures for a corporate rent-a-captive program include: Large Deductible Plans Coupled with a Deductible Reimbursement Policy. The insurance company issues a policy in which the insured takes a sizable deductible and the rent-a-captive issues a policy directly to the insured for the deductible layer. The insured then funds the deductible layer with a combination of premium and collateral.

Fully-Funded Arrangements
A company may encounter difficulty in obtaining coverage for a particular insurance exposure or may only be able to obtain coverage at an exorbitant premium that is out of line with the exposure. In such cases, the company may seek to fund the aggregate limit of its policy with a combination of cash and letter of credit. A rent-a-captive often serves as the funding mechanism for this. This product is well suited for an insured who is required to demonstrate evidence of insurance.

Self-Insurance Wraparounds
A company may be unable to qualify as a self-insurer in all states in which it has exposure. A rent-a-captive enables the company to remain self-insured in those states in which it qualifies, while consolidating its exposure in other states into a coordinated, seamless overall insurance program. Of course there are groups of individuals and brokers who find rent-a-captive structures appealing for similar reasons to the corporate buyer.

Associations or Industry Groups
Associations, industries or groups of buyers with similar risk management styles can share risk in a rent-a-captive program to achieve economies of scale or solve an insurance problem. The actual structures, coverages, risk sharing, ownership, and management can differ depending on the need of the group. A strong business plan and a clear understanding of the legal ramifications by each member is critical in this structure. A limited group of small companies that don’t meet the premium threshold on an individual basis can get together, pool their assets and liabilities and structure a rent-a-captive. This enables companies that are too small for their own rent-a-captive to realize the benefits enjoyed by larger companies.

Insurance Agencies and Brokers
An agency-rent-a captive can be formed in which the agent or broker shares in the insurance risk of their clients insurance programs. A portion of the insurance risk is typically reinsured to the captive in which the agent has contractual ownership of the results.

Protected Cell (Segregated Account) Structure
Before the development of cell companies, multiple entities operating within one rent-a-captive had separate accounting for their assets and liabilities but no legal separation. Therefore, if one entity had losses exceeding its assets, the other entities made up the difference. While many captives still operate this way today, and very successfully so, the advent of the cell company has piqued the interest of many potential captive participants due to the brick walls that are created between the owners’ assets by the cell structure.

I will add more tomorrow on the Protected Cell Structures. This post is long and boring enough for now.

Adjudication is the process in which a judge examines the evidence, arguments and legal argument brought by two opposing parties. After examination, a decision can be made to the determine the rights and obligations between the parties involved. There are three types of disputes that can be decided through the use of adjudication. They are:

1. Between individuals or corporations

2. Between public officials and private parties

3. Between public bodies or public officials

I have not posted on captive insurance arrangements for many months. The last time I posted was when the IRS surprised me by basically leaving captives in place. I had thought the IRS would not let captives keep their tax-free status overall.

In this tough economy, companies and governmental entities are searching heavily for the most economical risk transfer strategies possible. Captives may be the answer to some but not all insurance situations. I used to think that employers had to be large enough to be self insured before even initiating a captive analysis.

The rent-a-captive option now even allows companies that are not large enough to be self insured under Workers Comp to possibly use captives as a very economical method to handle your Workers Comp risk and claims. I thought that I would examine rent-a-captives a little further. After reading the information on the IRS website on captives, my head was spinning.

In a rent-a-captive’s simplest form, a corporation will purchase insurance from a traditional insured and reinsure a portion of the risk and loss fund to a rent-a-captive structure. The corporation will typically have a contractual agreement with the captive that will provide the insured with the underwriting and investment profits on the program via some form of a dividend. The claims are paid by the fronting carrier and reimbursed by the rent-a-captive.
I will cover the different types of rent-a-captives in my next few posts.

The term refers to the amount paid out due to a loss or damage. In Workers Comp, indemnity benefits pay an employee for lost wages due to an on the job injury or illness. It covers anything that prevents a worker from returning to work either temporarily or permanently.