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Our typical client has a workers compensation
premium of between $50,000 and $750,000. If it is less than
$50,000, it is just too small for us to save the client very much.
And, once a company’s premium rises above $750,000, their
coverage usually incorporates elements of self insurance that
preclude the need for our services.
Experience has shown that for those with
premium between $50,000 and $750,000, a client's management
is typically conscientious of safety, loss prevention, and
claims management. When an employee is hurt, they do everything
they are supposed to do. They stay in close contact with the
claims adjuster, doctor, physical therapist, and attorney.
Loss runs are reviewed regularly. The client knows that everything
that can be done to lower premium has been done.
Well, not quite. They have never analyzed
an auditor’s worksheet, checked state authorized rates
against their policy, or had the experience modification independently
calculated. They have never seen Tables I thru IX (Premium
Discounts). Nor have they heard of an Expected Loss Rate,
Stabilizing Value, or a host of other details. They have no
idea of the difference between a General Inclusion and a Standard
Exception.
When I began this business in 1979, I expected
to find mistakes hidden in the subtle details that most people
overlook. I never expected to find the obvious errors. To
my pleasant surprise, I was wrong. It just seems that insurance
companies are so efficient at moving large amounts of paper
out the front door that they have overlooked many of the details
that comprise their business.
A typical example: Several years ago a
client called. Their new NCCI experience mod calculation had
arrived and they presented the challenge for me to “find
something wrong.” Their insurance agent and underwriter
had reviewed the worksheet and confirmed that there were no
mistakes. (I love it when they say that.)
When it came off the fax machine, one mistake
practically jumped off the page. The modifier consisted of
three years of policy data. In the second year, all the payrolls
were rounded to even 1,000’s. That seemed odd. I made
a few telephone call and learned what had happened. The audit
for that year was never completed. It seems that the auditor
had scheduled the audit during the summer when the entire
plant had shut down. When he arrived, he was unable to compete
his audit. Instead of rescheduling, he simply submitted estimated
payrolls that were 50% higher than those on the policy.
When the invoice arrived, it was paid,
filed away, and forgotten. It was also $76,000 higher than
it should have been. Once the truth was learned, we provided
the actual payrolls to the insurance carrier. I have to admit
that in all the years I have been in this business, this was
the easiest mistake ever found. Needless to say, with every
new client, I first check for payrolls that are rounded to
even thousands.
The funny thing is, the insurance company
never considered this to be a mistake. To use their terminology,
it was a “forced audit”, designed to get the policyholder's
attention. Call it whatever you like, it was an audit that
generated a premium $76,000 higher than it should have been.
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Years ago, I attended a meeting of insurance
auditors. The meeting was at one of Las Vegas’ largest
and glitziest hotels. At one of the seminars, the discussion
moved to the Premium Audit Department’s contribution
to an insurance company's overall profitability. As the seminar
progressed, it became obvious that the insurance industry
considers the audit department to be a “profit center”.
In the past, auditing was a support function to underwriting.
In the old days (1970s) underwriters would
price the policy at its inception. After the policy expired,
the auditor would assign actual payrolls to classifications.
But over the years, as overall premium levels increased, insurers
began to realize that the majority of premium audits resulted
in additional premiums. That is when they knew that there
was money to be made in this end of the business.
This is not to say that mistakes are deliberate.
Usually they are not. But it is clear that the subjective
discretion that is available to auditors and underwriters
leaves enough room to steer the premium in a desirable direction.
Permitting a workers compensation auditor to determine your
premium without an independent review is like letting the
IRS decide how much you owe in taxes without first consulting
with your accountant.
Most of you have an insurance agent or
broker. He or she is probably good at what they do. They know
the insurance markets and policy coverages. They have good
relationships with underwriters, claims adjusters, loss control
personnel, and auditors.
But it is safe to say that few have ever
completed a payroll audit. I would venture to guess that fewer
have ever looked at a payroll register or a quarterly tax
return. And one more fact; the commission they earn is based
on the premium that you pay.
While it is a paradox, the employers who
could benefit the most from our service are usually those
who most resist giving it a try. Maybe it is ego, or maybe
they are just stubborn. Either way, it is their dollars that
are paying for those Las Vega seminars.
If you are not one of those skeptics, give
us a try. To get started, we just need a little bit of information.
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