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Investing in Workmans’ Compensation Safety Really DOES Pay

Guest post by: Ari Rosenstein

Article Overview: In tough times, when businesses are hunkering down and trimming the fat, one of the most common questions regarding workmans' compensation insurance is, “Should I really invest in safety?” We thought we should step back for a minute and consider how investing time into creating a safe work environment will have a much greater impact on your workers’ compensation rates than shopping carriers.

Investing in Workmans’ Compensation Safety Really DOES Pay

In tough times, when businesses are hunkering down and trimming the fat, one of the most common questions regarding workmans' compensation insurance is, “Should I really invest in safety?” After all, things seem to be going just fine. Sure, you’ve had your share of injuries, but who cares? After all, isn’t that what workmans’ compensation insurance is there for?

Most employers would rather spend the time talking to brokers, preparing application packets, and shopping insurance carriers in an effort to find the best deal, than invest one dime in safety.

We thought we should step back for a minute and consider how investing time into creating a safe work environment will have a much greater impact on your workers’ compensation rates than shopping carriers.

A Story of Two Warehouses

Let’s take an example of two warehouses, each with $2 million of payroll. One company – let’s call them Warehouse A – spends 3 months choosing a broker and submitting application packets to half-a-dozen insurance carriers. In the end, it receives bids from two carriers. One offers an average rate of 4.6% for a total annual premium of $92,000. The other offers an average rate of 5%, for a total premium of $100,000.

Not bad – an $8000 savings for a couple months of work. Figuring they were set with a great rate, they neglected their safety program, didn’t conduct regular meetings, and were careless around the warehouse. One by one, the injuries started. First a sprained back, then a slip, and eventually a forklift accident that left a worker paralyzed from the waist down. When it came time for renewal, their insurance rates shot up. Why? Because their Experience Modification jumped through the roof.

What is an Experience Modification, and why should I care?

The Experience Modification (or Ex Mod) is a factor calculated by the Workers’ Compensation Insurance Rating Bureau (WCIRB) based on an individual company’s loss history. This factor, indicated by a percentage that is applied to the insurance rates, will decrease with a favorable loss history, or increase bad loss history. All companies begin with a 100% Ex Mod. So, in simple terms, the more injuries you have, the higher your Ex Mod rate, the more premium you pay. The fewer injuries, the lower your Ex Mod, the less premium you will pay.

So let us go back to our friend, Warehouse A, whom we discussed in last post. After multiple injuries, their Ex Mod jumped from 100% to 125%. So, despite writing the same cheap deal in Year Two ($92,000 of base premiums), their net premium jumped to $115,000 ($92,000 X 1.25).

IN THE MEANTIME, Warehouse B did not spend as much time as Warehouse A shopping for insurance. They ended up with the slightly more expensive deal, paying $100,000 in base premiums. However, the management of Warehouse B took safety seriously. They did not just try to satisfy the minimum OSHA requirements. Rather, they invested a few thousand dollars in new safety equipment, training videos, and incentivizing the warehouse manager to create and manage a safety plan. From their efforts they only sustained a few minor injuries over the course of the year.

The result? Their Ex Mod dropped from 100% to 82% due to their favorable history. Despite keeping their same, slightly more “expensive” plan with a base premium of $100,000 as they had the previous year, their net premium plummeted to $82,000 ($100,000 X .82), due to their excellent loss history.

In Summary:

After 2 years, Warehouse A, who spent hours upon hours searching for the best rate in town failed to take safety seriously and ended up with an annual Workers’ Compensation premium of $115,000. Warehouse B, who took the time and a little money to invest in safety programs, garnered a premium of only $82,000, a whopping one year savings of $33,000 less than their friend!

Now I ask you, are you still wondering if investing in safety pays??

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Article Tags: experience modification, safety, workers compensation insurance, workmans comp



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