Does My Workers Comp Audit Refund Indicate That I Received A Fair Price?
- Stuart Cytron
- Jun 3, 2020
- 6 min read
Updated: Mar 28
Below:
A Workers Compensation Audit Refund Doesn't Indicate Overpayment or Underpayment
It means that you paid too much during your policy term. Your payroll was overestimated for the past year and, as a result, you overpaid workers comp premiums and gave your workers' compensation insurance carrier an interest-free loan.
I have received the following comment from clients numerous times; "Stuart, don't worry about auditing [that] year. We got a work comp audit refund."
The sentiment from the client quote above is understandable since everyone knows how hard it is for an insurance company to part with its (your!) money. Clients feel receipt of a refund check from a workers comp audit must be an indicator of proper treatment, pricing, etc. But, this isn't really the case.
Almost all of the workers comp audit refunds you'll ever receive from your workers compensation insurance carrier occur when business activity (payroll) falls. For work comp you are charged a rate for every $100 of payroll. So, you should naturally receive a work comp audit refund at the end of the year if payroll is down from your initial payroll estimates. This is a routine result of a work comp audit and has nothing to do with proper pricing.
Workers Comp Audit: What Could Go Wrong?
In reality, when I perform a work comp audit of historical policies for overcharges I find errors that result in workers comp audit refunds equally between years when annual payroll audits both returned refunds and those that resulted in additional premium. Maybe you received a $7,000 refund but it should have $27,000!
How is work comp calculated? That is an important question. And, knowing the answer can illuminate many of the reasons why there are frequent errors; so many moving parts involved to calculate accurate premiums:
Determining accurate work comp payroll
Determining proper employee classification
Schedule Rating (safety) Debits & Credits
Auditing Contractor's Credit Calculations
Proper application of mid-term endorsements
Rating Bureau rule & State Regulation compliance
and so on....
Beware Of The Workers Comp Audit Sleight Of Hand
Another issue that can be identified during a workers comp premium audit for you to address at renewal could be taking a close look at rates of your "underwriting company." Has your account shifted from one of your carrier's lower-priced underwriting companies to a higher priced underwriting company?
This is a common way workers comp carriers maintain the amount they charge in declining rate environments or when your experience modification rate calculation is falling.
Travelers, for example, has multiple underwriting companies (this isn't a complete list, but, rather, what I came up with off the top of my head!) each of which has different filed rates:
The Travelers Indemnity Company
The Travelers Indemnity Company of America
The Travelers Indemnity Company Of Connecticut
Travelers Casualty and Surety Company
Travelers Casualty Insurance Company of America
Travelers Property Casualty Company of America
etc.
I'm looking at a Missouri-based company's file right now (Travelers account) whose history is:
19/20 Current Policy - The Travelers Indemnity Company Of Connecticut (most expensive of these 4 based on current filed MO rates)
18/19 Last Year - The Travelers Indemnity Company (2nd most expensive of these 4 based on current filed MO rates)
17/18 - The Travelers Indemnity Company of America (least expensive of these 4 based on current filed MO rates)
16/17 - Travelers Property Casualty Company of America (3rd most expensive of these 4 based on current filed MO rates)
(Important: this is not a knock against Travelers. All workers comp insurance carriers do this because of state regulations that don't allow an individual insurance company to tier it's rates.)
So, this company probably has no idea (yet) that they've been bumped into progressively more expensive work comp underwriting companies over the last 2 years. The work comp rate environment in Missouri, like the rest of the country, has been declining in recent years, but a business like this one has not enjoyed the benefit (at least not the full benefit).
Many clients are working hard, reducing work comp claims, and reducing their workers comp experience mod but still not seeing the price decreases they were expecting due to "circumstances" like shifting underwriting companies, increased Schedule Rating debits (or reduced credits), etc.
When clients get that feeling that "something doesn't seem right" usually their gut is correct.
3 Ways To Learn If You're Getting A Good Price For Workers Comp Insurance
You can do just one, 2, or all 3 of the following!
1) Take your workers comp program to market.
We are in the age of AI. Information is abundant and at our fingertips within moments.
Cytron Group LLC can tell you every insurance company's filed workers compensation rates in every state. And, as far as placing work comp, we are not limited to the handful (or less) of workers comp insurance companies with whom your broker works.
In Missouri, for examples, there are 532 (2024) insurance companies approved to sell workers comp. Why not vigorously price shop your work comp? You don't have to bid your whole Property & Casualty program. But, at least, your workers compensation insurance.
Nothing To Lose, Everything To Gain
Workers comp insurance is unique because it is (or in most cases) a commodity. The policy is a "contract of adhesion." Or, in other words, take it or leave it. Insurance companies present you with the policy contract and you can only choose to sign or not sign. There's no negotiation. The contracts are all the same, and your competitors' contracts are identical to yours. There are no choices in the matter of coverages, exclusions, etc.
2) Hire An Independent Workers' Compensation Premium Auditor
If you refer back to the section "Workers Comp Audit: What Could Go Wrong?" you'll find numerous examples of errors we commonly find with premium determination that result in workers compensation refunds. There are a lot of "moving parts" to say the least.
Workers comp audit engagements are typically free to initiate making it easy to add an expert to your team. And, an independent workers comp auditor works for you with no objective other than to reduce your workers comp premiums.
3) Track The Right Workers Comp Metric
If you're not quite ready to take your account to market, a good starting point is to calculate your Cost Per Full-Time Employee. And, calculate it retroactively for, say, the last 5 years to look for trends.
Cost Per FTE helps you see through the murkiness of fluctuating payroll. Your rising or falling payroll makes it hard to tell if your program is getting more or less expensive. When you are hiring you expect to pay more for work comp, and the increased business activity is great. But, as your payroll grows you can watch this Cost Per FTE to make sure the increases are due ONLY to your rising payroll and not some other factor.
On the other hand, if your total work comp spend is declining due to decreased business activity (payroll), it's possible to receive refunds and a lower total renewal price while your Cost Per Full-Time Employee increases. In this case it's just an illusion that your program is becoming less expensive because of reduced payroll if your Cost Per FTE is actually higher.
Please Don't Tell Anybody (Broker) Where You Heard This!
Calculate your current and retroactive Cost Per FTE.
Let your broker know that you are tracking this and expect him/her to assist in bringing this indicator down. If you don't get good pricing options, cost containment ideas, return-to-work, etc, then let me know (I have plenty!).
Benchmarking Your Workers Comp Expense
If you calculate this metric annually you can use it for benchmarking by comparing it to industry results found in the annual RIMS Benchmark Survey. It's pretty straightforward to calculate Total Work Comp Spend / # Of Employees, but let me know if you have any questions (e.g. how to account for seasonal, temporary employees).
This whole discussion assumes that you aren't experiencing volatile changes in claims every year which would have a reasonable and expected impact on your losses, risk profile, pricing and Cost Per FTE. But, if you're stable or making steady improvement in claims management and your program cost (Cost Per FTE) isn't following along, there's a reason. And, an independent workers comp audit can expose that reason or reasons.
What Else Could Go Wrong Beyond Your Workers Comp Audit?
Beyond overcharges that can be addressed by a work comp audit there could be a number of issues you can only address at renewal. Maybe you're just not in the right program. Depending on your claim history and risk tolerance, you could examine the overall cost of a guaranteed cost program vs small deductible vs high deductible vs retro vs group captive and find that there are better ways to finance this risk (save money).
A work comp premium audit by and independent workers comp auditor can not only save you money immediately, but it can also identify issues to address at your next renewal and save you money down the road.
Stuart Cytron, MBA has been published in trade journals such Construction Forum St. Louis and St. Louis Business Journal among others. You can read more about Stuart and how he developed a passion for helping businesses reduce work comp expenses on his website.
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