I have received the following comment from clients numerous times; "Stuart, don't worry about auditing [that] year. We got a refund."
The sentiment is understandable since everyone knows how hard it is for an insurance company to part with it's (your!) money. Clients feel receipt of a refund check must be an indicator of proper treatment, pricing, etc. But, this isn't really the case.
Almost all of the refunds you'll ever receive from your work comp 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 refund at the end of the year if payroll is down from initial estimates. This is routine and has nothing to do with proper pricing.
What Could Go Wrong?
In reality, when I audit historical policies for overcharges I find errors that result in 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!
One of the reasons there are frequent errors is that there are so many moving parts to calculating premiums accurately.
Determining accurate work comp payroll
Determining proper employee classification
Auditing Experience Modification Rating data
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....
Beyond 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).
Another issue for your renewal could be a close look at rates. Is your carrier competitively priced? Has your account shifted from one of your carrier's lower-priced "underwriting companies" to a higher priced underwriting companies?
Travelers, for example, has multiple underwriting companies each of which has differentfiled 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
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 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 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 claims, and reducing their 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.
How Do I Know If I'm Getting A Good Price?
A good starting point is to calculate your Cost Per Full-Time Employee. 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).
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.
This whole discussion assumes that you aren't experiencing volatile changes in claims every year which would have a reasonable impact on your expected losses, 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 audit can expose that reason or reasons.
Please Don't Tell Anybody (Broker) Where You Heard This!
Calculate your Cost Per FTE and even go back a couple years. Then, share the figures with your broker.
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!).
Why This Is Important
Lastly, I posted the image below a month ago and I really think that upcoming audits (policies expiring at the end of 2020 and beginning of 2021) are going to be complicated. Even though you may anticipate refunds and reduced premiums due to falling payroll, let's be diligent about keeping everything else in line. We don't want bigger, more expensive problems down the road after some normalcy returns to our businesses and the economy.