What price workers' compensation insurance?
It's a Catch-22 for many manufacturers. Not having workers' compensation insurance can put them out of business. Paying for workers' compensation insurance can put them out of business. How is a company to survive?
According to an article in the June 23 issue of The New York Times, the cost of workers' compensation insurance has soared to its highest rate in nearly a decade, adding yet another heavy burden on businesses and the struggling national economy. Nationwide, the average cost of the insurance has risen 50 percent in the last three years.
Workers' compensation insurance is state regulated with no federal supervision. Rates vary from state to state, and states offer coverage for those businesses that are uninsurable by commercial carriers or that choose the state-endorsed plans over commercial coverage.
Why the Sharp Increase?
The New York Timesarticle suggests several reasons for the sharp rise in rates. The rate of increases accelerated markedly after the insurance industry lost at least $40 billion in the Sept. 11 attacks.
Rising medical costs have far outpaced increases in workers' compensation rates. While claims have dropped 36 percent over the last decade, the average medical cost per claim has nearly doubled. In California, a state experiencing the fastest-rising premiums, the average medical cost per claim nearly has quadrupled in the past decade.
Paul Norman, CEO of Norman-Spencer Inc., a company that helps industries select the best insurance programs for their needs, said, "From an insurer's perspective, workers' compensation is the loss leader. Rates are and have been inadequate. Increases have not been consistent with incurred medical costs."
Other contributing factors are legal costs attached to filing and fighting claims and fraud.
In California, workers' compensation insurance premiums have seriously affected the viability of many businesses. David Goodreau, chairman of the Small Manufacturers Association of California (SMAC), cited the expense as a contributing factor in the high cost of doing business in California—one of the reasons the state's manufacturers are experiencing economic meltdown. Goodreau said, "Workers' compensation rates are increasing by more than 100 percent over the last three years. According to the California insurance commissioner, the system is more than $10 billion underreserved."
Allan Zaremberg, president of the California Chamber of Commerce, stated, "The only way to reduce your cost is to reduce your payroll." Businesses are firing employees so that they can reduce their premiums. Businesses also are relocating from California to less costly states.
On the Agenda
Governors, legislatures, and insurers are working diligently to address the skyrocketing costs and help relieve the burden on manufacturers. But will their efforts be too little too late? Will more and more workers be laid off in cost-cutting efforts? Can manufacturing survive the financial hardship long enough for conditions to improve?
In the Meantime
There are things you can do to help control insurance costs. Terry Stevens, assistant vice president, casualty underwriting, CNA Insurance, said, "The most important aspect in controlling insurance costs is to create a safe operational environment for employees and customers, which in turn minimizes the number of claims over the long term.
"The key ingredient to a safe business environment lies in management and training of employees. The objective is to create a culture of safety that is understood, accepted, and practiced by all employees."
Stevens said the key aspects of a functioning safety culture are:
- Establishing and maintaining an active safety committee
- Establishing and maintaining a company policy that decreases time lost from injuries. Often referred to as "back to work" programs, the employee and employer mutually benefit through reduced periods of disability. Productive employees remain productive, and claims are disposed more quickly at lower administrative and disability costs.
- Learning from mistakes through postaccident investigations.
- Creating safety awards and safety incentive programs for employees.
- Keeping safety in the forefront with signage and regular safety seminars.
CNA administers the Fabricators & Manufacturers Association International™ (FMA)-endorsed program for sheet metal manufacturers. Commenting on the program, Stevens said, "In the past three years, 41 percent of the workers' compensation claims with the program involved material handling incidents and accidents. As a result, ergonomic issues and an ergonomic review of operations are critical components of an employee safety and risk management program.
"Automobile accidents are a major cause of severe workers' compensation claims resulting in significant employee disabilities and lost time. Thus, safe-driver standards and programs are a critical component of any employee safety program."
According to Stevens, an often overlooked factor that can contribute substantially to increased claims and premiums is the effect of uninsured subcontractors. "All subcontractors working on behalf of the employer or on the employer's premises should be required to produce evidence of current workers' compensation insurance. Otherwise, the employer runs the risk of unknowingly hiring uninsured subcontractors and being responsible for work-related injuries to those subcontractors."
While it is likely that workers' compensation premiums will continue to rise in proportion to medical costs, the company with the best safety record stands a better chance of securing the lowest possible rate. Now more than ever, safety can mean the difference between a company's life or its death.