De-Myth-ifying Workers’ Compensation - 10 Myths Busted

De-myth-ifying Workers’ Compensation

Part One

In the world of Workers’ Compensation, there are several common assumptions that, although understandable, can cause retail brokers to inadvertently mislead their insureds. These assumptions are based on Workers’ Compensation folklore and are specious in nature; some of these myths may have once (upon a time) been grounded in truth, but many of these insurance tropes turn out to just be fairytales after all.

To our retail partners out there, let me be clear: it’s not your fault! These parables have been passed down and evolved overtime; they’ve been influenced by rumor, clever marketing, oversimplification, and wishful thinking. So, let’s bust some myths. There are many more than 10 out there, but these 10 are a good sample to “debunk.”

Myth 1.

An insured’s XMOD determines the quality of an account.

A MOD number is promulgated using three years of an insured’s loss data, by class of business, as it compares to the loss averages for those same classes in the relevant state/s that the exposures exist. This computation means that the MOD is a kind of “beauty pageant” for insureds where ”1.00” is the average contestant (insured). The lower the number, or the further below 1.00, the more aesthetically-pleasing the client; however, simply relying on MOD alone would be like crowning Miss America based solely on the bikini round of the contest and ignoring miss Colorado’s Nobel Prize-winning PHD research in genetics!

By Shawn-Michael Hall Sr.

The calculation of the MOD alone leads us to several problems that exist in relying on the MOD as the Miss America of ranking client performance. Most reputable carriers actually require at least five years of loss data with submissions. If a MOD is predicated on the middle three years of experience, we have an obvious problem: the two years of unaddressed loss information. The fifth year (oldest) may be the most important as it is the most historically viable with the most developed losses. The current year also cannot be discounted from contemplation, as the current experience allows us a window into the current loss trend of the client in question. Really, how accurately can we assess overall performance with 3/5 the relevant data? 3 out of 5 grades on a report card…. 3 out of 5 years of a marriage… 3 out of 5 cards in a hand of poker… 3 out of 5 PowerBall numbers…. etc. MODs are not sufficient for the sake of appraising risk quality.

As if that weren’t enough, do you know how misleading an MOD can be? Imagine you have a client that has four out of five years during which they are completely loss free. The third year of experience has an influx of claims that is, luckily, an aberration. Unfortunately, the MOD doesn’t see it that way. One horrendous year on the experience of a client that, historically, has a 0.60 MOD number can lead to a giant debit. Is that same client’s 1.4 XMOD indicative of the fact that they are a “bad risk”? Of course not!

I know many retail brokers preach the importance of “lowering one’s MOD” to clients. This ambition could help, but clients are much better off focusing on lower claims frequency, updating safety protocols,

communicating with their carrier, helping their employees return to work after an injury, and simply bettering workplace culture as much as possible.

Myth 2

Base Rate fluctuations from carriers will determine my client’s renewal pricing.

Consider this example. Client A pays 100K in work comp premium. Client A has had a string of bad luck and has had two years in a row of 200% and 250% loss ratios respectively. Client A’s workers’ comp carrier’s base rates dropped about 4% coming into the upcoming renewal and the client has asked if they can “expect a decrease in their NET rates.” (Granted, this example is a bit over the top, but stranger, even more hyperbolic, requests have been made by insureds.)

Carrier base rates typically fluctuate for one of two reasons. The most common is that a carrier has analyzed a specific class, or classes, of business and determined they aren’t making the right amount of profit on that class, and thus increase or decrease rates. The less common scenario occurs when the state, or governing body of work comp, issues a “recommendation” for statewide rate increases or decreases.

You will note that neither of these scenarios has anything to do with specific insureds/clients and so, at its core, should not influence the underwriting of a specific account – especially if the insured is large enough to carry its own loss history credibility. The moral of this story is that base rates have very little, if anything, to do with the underwriting of any one specific client.

Myth 3

Placing my client’s WC coverage with a “Big Standard” is the best carrier option.

Your big standard carriers rarely have much specialization in workers’ compensation underwriting. 9 times out of 10 a computer will be determining the pricing of your insured’s file. Sometimes, this strategy can help your cause if your insured is a bit of a “dog” and you would rather human eyes don’t take the time to review the file. However, more often than not, you probably want a human to work on your business. Human underwriters are most often working for a carrier that specializes in writing monoline workers’ comp or at least writes WC as part of a specialized industry package, such as a large construction group offering WC/GL/Auto for files with premiums that combine to be over 1MM. In the world of WC underwriting, boutique specialization is almost always preferable to “big box shop.”

Myth 4

WC is a “set it and forget it” coverage because the broker’s job is done after placement.

Work Comp is a culture coverage. Happy employees don’t file ridiculous fraudulent claims, and happy employees work for safe companies, with good benefits, return to work programs, reasonable demands, a safe workplace, responsible foremen, competent human resources, and so on. As the retail broker, you almost certainly know more about accomplishing these goals than your client does and, if not, you can always ask your wholesaler, MGA, or carrier. I understand that if an insured is paying only 10K in workers’ comp premium, you probably don’t have the resources to tutor that client on these matters; however, for larger insureds, it’s a must and it will pay dividends. Not just monetarily, but culturally and your client (and carrier!) will appreciate the investment you are making in their success.

Myth 5

The “total incurred” for a given year is a definite determining factor of a year’s performance, it’s better if the “paid” losses are low as reserves can still go down, and an insured is doomed after a 1MM claim.

In short, “Nope…. Nooo… and NAHH!” This trifecta of myths might be better characterized as “The outcome of lossruns can be assumed based on current claims values and carriers over-reserve to boot!” On average, in Illinois, current policy year losses develop more than 2X. That may sound bad, but there are other states (CA, NY, and MA to name a few) in which current year losses develop by a factor of 3X or more. That development factor is only an average; if reserves are decidedly higher than paid losses, the factor actually goes up. Loss reserves, on average, continue to develop. They do not usually keep the same “total incurred” value as claims are paid, and it’s even more rare for the claim totals to decrease over time. High reserves are not a good thing. As with Myth 4, a retail broker’s, or wholesaler’s, involvement with the claims process can aid in the mitigation of loss development so long as the broker acts as a knowledgeable advocate for the client and as partner to the claims adjustor/s. The final point of the trifecta is that regarding the daunting, ominous, experience-crippling, even MYTHICAL, 1MM claim. A shock loss does not define your client. Most any experienced underwriter would much rather see a year with a single claim for 1MM incurred than 10 claims, in one year, for 750K incurred. The latter example clearly displays a more systemic problem than the other client who simply had one really bad day at work. Carriers do not want to see a bad, or unsafe, workplace culture (see Myth 4 again), but they can forgive that one unlucky day. Check out myths six through 10 in the April issue of Insight.

Shawn-Michael Hall Sr. is Division SVP, Managing Director of Workers’ Compensation for Breckenridge Insurance Services. He can be reached at shall@breckis.com.

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