Worker's Compensation: How to Pick a Ripe Carrier - Brief Article

California CPA, August, 2001 by Ingo Coolins

Everyone loves a "buyers' market," where sellers jockey for position by offering the lowest possible price. But the 1990s proved that with workers' compensation insurance--cheapest isn't always best.

The 1990s marked the most tumultuous decade in the 37-year history of California's workers' compensation insurance system. In addition to landmark reform legislation, one of the most significant events was in 1995 with the advent of "open rating," which produced the first truly competitive marketplace in the system's history.

OPEN RATING

Open rating freed carriers from mandated minimum rates and spawned a fierce buyers' market in which some carriers courted companies by charging artificially low prices to bolster market share without regard for long-term financial stability.

The first four years of open rating produced the most dramatic overall drop in premiums since the Great Depression--an average decrease of 30 percent. But some carriers, which initially slashed rates to inadequate levels, now have raised prices dramatically to recoup losses.

THE BOTTOM LINE

When shopping for workers' compensation coverage, all business owners should consider several factors--starting with price.

With workers' compensation coverage, the cardinal rule is to make sure you compare final quotes and not just basic rates. Rating plans or the discounting schedules of workers' compensation insurers yield final quotes that may be vastly different from their basic rates. What makes the difference? That depends on how you answer key questions:

* Are you receiving discounts for proactive programs you've instituted--programs that generally entail a lower risk for the insurer? Such programs include early return-to-work programs, comprehensive health benefits for your employees and full use of the medical control options.

* Do you fully understand the variables that could affect your final price, such as premium range discounts, subclass qualifications and group discounts? When comparison shopping, ask carriers to specify the variables that will affect your final price.

* Once you understand the pricing of your quote, ask: What am I getting for this price, and what do I need or expect? Can I rely on the carrier's financial strength?

STAYING POWER

A carrier's financial strength is crucial in today's volatile market. When carriers underpriced their workers' compensation product to gain market share in the late 1990s, some carriers became insolvent. Financial strength determines the insurer's ability to pay future claims and its ongoing competitive influence in the insurance industry. Important indicators of financial strength or weakness include the carrier's total assets, level of reserves and investment-portfolio quality.

To determine the carrier's financial condition, review the carrier's annual report or check with the state Department of Insurance. You also can study the financial ratings assigned to the carrier by major independent rating agencies.

OTHER CONSIDERATIONS

Strong medical cost-control programs effectively reduce the medical costs of a claim. Well-managed carriers offer attractive rates to businesses whose owners take an active role in enhancing and maintaining workplace safety.

You'll want to find out how the carrier's rating system changes based on claims history. Open rating increased the impact a business' claims and accident history has on policy pricing. Not only does the experience-modification system--which compares your business' claims with your industry's average--still apply, but carriers also may use their filed rating schedules to increase your costs because of poor claims/accident histories.

Does your carrier offer state-of-the-art claims reporting systems? Electronic access will help you fulfill your obligations by allowing reporting/filing of claims reports 24 hours a day.

Finally, does the insurer take an aggressive stance against fraud and other system abuses? Industry observers estimate that fraud continues to siphon millions of dollars from the system each year.

Does your carrier have a special investigation unit? What educational materials does it provide? Does it have a 24-hour hotline to report suspected fraud? Does it have a multi-faceted approach, including training, to fight fraud and abuse?

It can still be a buyer's market in workers' compensation, but only for educated buyers.

Ingo Coolins is the manager of broker/agent relations for State Compensation Insurance Fund, www.scif.com, California 's largest provider of workers' compensation coverage.