Workers' Compensation Profitability
When staffing firms set markups for clients, they factor in anticipated costs plus a reasonable profit. One of the critical costs built into the markup is expected workers’ compensation expense, which is typically a staffing firm’s second highest expense after payroll. This expense varies by state, class code and the firm’s loss experience, which is why accurately assigning the appropriate class code and managing workers’ compensation costs are such important objectives for successful staffing firms.
But, with all the focus on establishing expected workers’ compensation costs up front, firms may be overlooking that actual profitability is based on what occurs, not what’s expected, even for those on guaranteed cost programs. Without a system in place to evaluate workers’ compensation results by client, firms may be unaware of whether the business they conduct with a client is actually profitable or a drain.
The first step of evaluating profitability is to determine the metric you’ll use. Given that a loss ratio (comparison of claims to premium) at 60% is considered breakeven for most insurance carriers, staffing firms on guaranteed cost programs can use 60% of the appropriate net rate as a simple benchmark. Aiming to decrease your workers’ compensation costs? Set a target lower than 60%. Alternatively, firms can utilize loss costs or pure premium rates as a baseline for expected claim results. Loss costs represent the expected rate of claim payments per $100 of payroll and are what base rates are built off. Most states release updated values by class code annually.
In order to be able to conduct an analysis by client, you need to be able to identify which claims are associated with each client. Many insurance carriers can add client coding to loss runs and the claim reporting process. If your carrier doesn’t, keep a simple internal spreadsheet that identifies which claims are associated with each client to use as a reference.
Factor in Loss Development
As we’ve blogged about previously, total incurred doesn’t reflect the ultimate cost of claims. The more recent a loss occurred, the less credible the total incurred value is, as claims tend to increase over time as it reaches ultimate closure. Evaluating a client’s loss performance without adding in expected loss development will make the results appear more favorable than they actually are. Loss development factors you can utilize are available by state, as well as a countrywide average.
Determine how frequently you’ll evaluate loss results. Results should be reviewed at least annually and perhaps more frequently for larger clients or clients with claims activity that stands out. The more years of experience, the more credible the results, but pay attention to upward or downward trends.
Evaluating workers’ compensation profitability by client can seem overwhelming. After all, you’re in the staffing business, not the insurance business. A profitability analysis is typically best conducted with the assistance of your insurance broker who has the tools and resources to guide you through the process.
- The Bare Bones of Loss Development Factors
- What’s the Purpose of a Loss Summary?
- How to Read Your Loss History
- Workers' Compensation E-Book
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