Archives for July 2018
RISK SOLUTIONS – If your commercial insurance premiums end up being more—or even double—the amount quoted by your broker, you certainly want to understand why this happened.
And you also want to learn “how” this happened, so you can prevent it from EVER happening again.
We frequently get calls asking why insurance companies charge “audit increases” after audits by independent insurance auditors or by company auditors within the insurance company itself.
I spoke with three Independent Risk Managers about this issue to get some answers for you.
The top three reasons why audits increase commercial insurance costs are:
- Your company’s sales have gone up;
- Your company’s payroll has increased; or
- There were errors in the audit.
But, before we move on to learn more about these reasons why audits increase commercial insurance costs, you should be aware—if you’re not already—that most companies are only paying “an estimated premium” for certain types of insurance policies at the time of purchase.
Commercial insurance coverages with estimated premiums include:
- Workers’ Compensation;
- General Liability; and
If you didn’t know about this, then you’ve probably been blindsided by your audit increase estimate. And even if you did know—you’ll still want to make sure that you’re not paying any more than you should be paying.
Whether it’s a company auditor or an independent auditor, all three Risk Managers also told me that unintentional errors are frequently made—not just on the company’s side—but on the auditor’s end.
Your next best step is probably consulting with an Independent Risk Manager immediately. But continue reading for a few reasons that might give you hope that your audit increase total could be lowered significantly.
For example, one of our Risk Managers recently helped a client with an audit problem where they were facing a $17,000 audit increase charge.
After investigating, this Risk Manager found a common payroll-related error, which he quickly straightened out. The final audit charge for this client was less than $15.
Sales- Or Payroll-related Audit Increases
Your sales have gone up. Or your company has gotten so busy, you’ve had to hire more staff. Congratulations! These are some of those “good problems to have.”
But even if your sales have taken off or your payroll has grown in size, you still have some options to help ward off a big audit increase.
- Alert your consultant Risk Manager to the increase in business activity;
- Ask your Risk Manager to go ahead and track what your increased insurance cost might be; and
- Go ahead and start budgeting now for your projected audit increase.
But don’t stop there. It’s great to know a ballpark figure on how much you’ll have to pay. But you also want to ONLY pay the correct amount.
If you’re not already working with a Risk Manager, there may STILL be errors in your system that are affecting your premium costs.
Minor Errors Can Cause Major Problems
You shouldn’t have to pay extra premiums because of miscalculations and wrong classifications.
Your Risk Manager can perform a thorough investigation into ALL of the areas that are involved in ALL the different types of audits.
They know the correct procedures to follow and the essential information that needs to be checked. They’ll ensure that only accurate figures are used to define your company’s chargeable exposures.
They can not only prepare you for your audit, they can also check your past audits for common errors.
Some common errors to check include:
- Incorrect code classifications;
- Inaccurate sales records;
- Inaccurate payroll records, and
- Not establishing proper “limits” on executive payroll.
These are only a few of the many items that need to be checked and updated while preparing for your audit. This is the type of information that your Risk Manager can help you handle—ensuring that all necessary records are kept current and updated when needed.
To Audit Or Not To Audit
Just like your company is unique, all insurance companies are different, too. And all the different insurance companies have different policies and procedures for their audits.
Many companies believe it’s just their Workers’ Compensation and General Liability policies that get audited. But there are all types of audits, so it’s best to be prepared for all circumstances.
I asked for a few examples and then shared them below to hopefully help clarify this tricky-to-understand dilemma.
Examples Of Policies That Are Audited
Automobile Policies – An audit of your automobile policy will normally be based on the number of vehicles in your company’s fleet.
The number of vehicles you started with at the beginning of the year will be compared to the total number of vehicles this company is now providing coverage for at years’ end.
If you’ve increased your fleet size, this factor is an understandable reason for an increase in premiums.
If you have vehicles on your property that are not running, or have been declared as surplus or that have been sold—and they are STILL listed on your policy—these need to be deleted.
Property – Adding more property or equipment to your asset list during the year will cause a Property Value increase during a Property Audit.
Just make sure all of your records and books are checked for accuracy and that there are no properties or equipment on the list that shouldn’t be there.
General Liability – These types of premiums are driven by an increase or decrease in payroll or sales. Increased sales or payroll will lead to audit premiums being added.
Decreased sales or payroll should result in lower insurance premiums. If not, your audit needs to be re-checked by a professional.
Workers’ Compensation – One of the most common types of audit errors can be found in your company’s Workers’ Compensation codes.
You certainly don’t want to be paying higher rates for office employees who’ve been mistakenly classified as telecommunications tower repairmen.
Of course, this is just an example. But Risk Managers find errors in code classifications FAR too often. Both on the company-side and the auditor-side.
Having a professional double-check your codes and classifications could mean the difference in thousands of dollars in savings.
Payroll Audit – Another less well-known—but equally costly area—that drives up insurance costs deals with a company’s payroll.
Many companies add up their entire payroll and provide that total to their insurance company as the basis for their insurance coverage.
But, that’s not how it’s supposed to work.
The payroll amount for some of your higher-salary employees—your Directors and Officers—can be “limited” or “capped.” If your insurance company is not doing this, you’re going to be very surprised at the difference in cost.
For example, your Directors and Officers may make $400,000 a year. BUT, your insurance carrier can only charge you a premium on a much smaller portion of that amount.
Again, just for an example, the amount you’re required to pay on $400,000 could be around $175,000. So, you could have been paying premiums on $225,000 more than you should have been.
Another important note: You will also need to make sure all of your Directors and Officers are declared as such in the bylaws of your company.
There are many more considerations involved in audits than we can cover in a posting of this type. But to obtain the best possible rates for all of your company’s operations, it is essential that your records reflect only chargeable exposures.
Some areas of concern include:
- Sales – Records must be accurate for General Liability and assigned by the correct code classifications;
- Payroll – Records must be accurate for Workers’ Compensation;
- Auto – Will be based on unit numbers and increases in same;
- Workers’ Compensation – Based on accurate payroll, correct code classifications and Experience Modification Factors;
- General Liability – Based on sales and classifications records (should cross-reference back to the classifications for payroll and Workers’ Compensation); and
- Umbrella – An audit in this area will be based on sales or payroll records.
If you feel this is starting to become confusing, you are more than justified. Your time is better spent running your business than trying to figure out very-hard-to-understand insurance and Risk Management issues.
Risk Managers can investigate ALL of these types of insurance audits for you and ALL of your company’s records. They’ll ensure that you are prepared for increases in any areas. And most importantly, that you are protected against any unfounded increases.
So, why not consult with an expert?
Get a Risk Manager to:
- Review the hundreds of code classifications for you;
- Help you create an accurate payroll and sales record; and
- Ensure that the proper limitations have been placed on your executive payroll.
Now, you may be thinking, “But I can’t afford a Risk Manager.” Well, I have a nice last surprise for you. A true Independent Risk Manager is not only going to help you sort out all your audit issues, they’ll also help you get the lowest possible coverage prices.
And usually increased and enhanced coverages for LESS cost.
AND they frequently find hidden savings in MANY different insurance- and risk-related areas.
The Risk Managers I know—and who helped me with this post—have ALWAYS found enough savings for their clients to MORE than cover their fees.
To learn more about several other ways that your business can benefit from Risk Management services, please visit our Common Types of Risk Management Issues section.
We’re Here to Help If You Need Us!
RISK ROUNDUP – You’ve heard many times that “Knowledge is Power.” We’re here to tell you that there is A LOT of power in having the knowledge of HOW TO check your Experience Modification Factor, also known as your Experience Modification Modifier.
Many businesses are not aware that this type of formula—when calculated incorrectly—can add unfounded overcharges to their Workers’ Compensation premiums.
For that matter, many businesses have no idea there is anything they can do about saving money on Workers’ Compensation costs.
Adding more confusion to the equation is the fact that your Experience Modification Factor and your Workers’ Compensation Codes actually AFFECT each other.
So… if either of these is wrong, you’re going to be paying WAY more than you should have to.
But, for right now, let’s try to begin at the beginning…
How to Check Your Experience Modification Factor: Lesson 101
The National Council on Compensation Insurance (NCCI) is the organization responsible for calculating your Experience Modification Factor.
(You could say the NCCI is like the Wizard of Oz of Workers’ Compensation… Or maybe not. But we have to have a little fun in this dry-as-dirt, nearly-impossible-to-explain post.)
OK, so, the NCCI takes your payroll amount versus your losses amount and THEN they compare it to other businesses in the same industry.
They are comparing it to YOUR industry as a whole.
This is your total payroll for your entire business versus the amount of losses or Workers’ Compensation claims that you have.
Again, they take this information and they compare it to other people in YOUR exact field.
If you’re a lumber company, they compare your figures to other lumber company’s figures.
If you’re a trucking company—etc. If you’re a telecommunications provider—etc.
I can tell you’re with me so far—and you’re saying to yourself, “This is not hard to understand at all.” But that’s because you are really smart. (I had to have someone explain this to me 20 times.)
Your Unique Experience Modification Factor
YOUR Unique Experience Modification Factor is then put on your Workers’ Compensation Insurance policy.
If you have a really good loss record—meaning hardly any claims—then you’ll have a good “modifier” number.
If you have a bad loss record—with a lot of claims—then you’re going to have a number that you don’t like so much.
And you’re going to have to PAY more for your Workers’ Compensation policy.
The NCCI also has a system of “credits” and “debits” based on your formula.
If you have a high payroll and low losses and your Experience Modification Factor (or modifier) is less than 1, then you get something called a “debit” on your Workers’ Compensation.
For example, if your modifier is .85, then you’re actually getting 15% back because the Wizard of Oz can see that you’re doing good with your losses.
BUT… if your payroll remains the same and then your losses go up really high, and that modifier goes above 1—then you’re gonna get what’s called “credited.”
BUT… BUT… you’re not really getting a credit—you’re gonna get charged for that.
(Is it just me or do these not sound like they are the opposite of what-was-previously-known-as-credits-and-debits?)
Okay. You’re now at 1.15. You had .85 and then you went to 1.15. This is horrifying! This means that not only are you going to pay your basic premium—you are going to have to pay that amount PLUS 15% more.
For those who are math challenged (like me), that was the 1—and then .15 over the 1—that got you the bonus charge of PLUS 15%.
The Wizard is punishing you because your losses are not performing like they should be based on your payroll.
You are having a lot of losses compared to most people in your industry with similar payrolls.
Is there anything you can do?
Yes, you cut your losses!
We don’t mean quit—we mean get on the Safety Train and get some classes and videos in there. And perhaps check out buying some new equipment if everyone is getting hurt on the same piece of machinery.
Is there anything else you can do?
How to Check for Common Errors in Experience Modification Factors
You should go through your NCCI Worksheet with a fine-toothed comb. (Translate: You need to actually “do” what that cliché “means.”)
Make sure that they’ve (NCCI aka Wizard) put in all the correct Workers’ Compensation Class Codes for your employees.
This is known as “Cracking the Code.” (Not really. I just made that up.)
And most of all, you want to make sure your payroll has been entered correctly.
I’ve been told that’s where many of the unfounded issues are found. (Actually, I was told that’s where the issues were found, but saying unfounded issues and then found was too much fun to pass up. But this is NOT about me… Sorry)
IF your payroll was put on the worksheet incorrectly, it’s going to have a very big positive or negative effect on your premiums.
And your payroll is just one of a (too-complicated-for-me-to-understand) series of “little factors” that go on the worksheet and then “get multiplied out” to create Your Unique Experience Modification Factor.
(At this point, you’re realizing you probably need professional help—and you may think I do, too. Just bear with me a few more sentences.)
IF your company is REALLY a Number 1, but it’s classified as 1.5, then you’re actually paying another 50% of premiums! HELLO!
BUT, if you have a .5, that means you’re getting 50% BACK. And that’s REALLY good news!
ALWAYS double-check all the information related to your Experience Modification Factor.
That just makes good (dollars and) sense!