The Gap Between Safety and Workers Compensation Premiums

There is a gap in the current workers compensation market. Traditionally, employees are classified based on job risk and priced accordingly. If rates are high, companies can lower them if they experience fewer losses. But even with zero losses, it takes time.

In fact, it takes up to three years for a claims-free business to see a reduction in their premium. 

That’s astounding. 

If preventative safety engagement was factored into premiums, safe companies could save a huge chunk of the $1 billion per week spent on workers compensation coverage. 

Until now, insurers have allowed high premiums to extend beyond their life spans.

Today’s real-time risk management technology can close the gap and strengthen the correlation between safety and workers compensation premiums. 

The Lagging Cost of Workers Comp Coverage

There’s currently no real-time correlation between effective safety programs and workers compensation rates. It would be too risky for insurance companies, so companies that develop great safety plans don’t experience an immediate benefit in their premium bill. 

This leaves a costly gap during which employers must invest a great deal of money into safety and premiums at the same time. 

Traditional workers comp looks at outcomes instead of working from the beginning to develop a plan that keeps people safe and costs down. Modern risk management technology presents a new opportunity to examine this model and change it for the better. Workers compensation plans that reward safe behavior are the future of effective loss control programs. 

The expenses associated with workers compensation and injuries are very high — and the costs are not only monetary. There are many direct and indirect expenses for workplace injuries. These can range from the costs of investigating an accident to challenges such as low morale. 

Most organizations and companies seek to reduce high costs like these in any way possible. While employers may develop great safety plans with good results, they will not always see this reflected in the premium paid. 

Calculating the Relationship Between Premium and Safety 

The most direct connection between premium and safety management is found in the claims experience. Over time, if an employer has fewer claims, the insurer may adjust the experience modification rate (EMR or ex mod). 

The ex mod is often pointed out as the direct tie between safety management and premium rate. Less frequent claims indicate effective safety programming, so the rate improves and premiums go down — three years later.

Because the ex mod is a ratio of claims to hours worked, larger companies have an advantage in achieving and maintaining a low ex mod. Small to midsize companies experience a more volatile rate due to their payroll-to-incident ratio. 

Implying safety through fewer claims made sense until now. Insurers should anticipate a reduction in claims based on safety engagement.

Safety Engagement Metrics Correlate with Fewer Claims

Just as the ex mod implies safe work practices through measurably lower claims, safety engagement metrics and leading indicators can help insurers determine when risk is reduced and future claims are less likely. 

Foresight has taken an important step toward creating a stronger correlation between real-time safety data and lowered premiums. By providing insureds with the ability to track and report safety metrics digitally, Foresight is able to factor new data points into its pricing structure and reward insureds with safety credits, at renewal.

It’s an innovative way to give insureds control over their policies. It shouldn’t take years to reduce risk-related costs if you’re consistently demonstrating safety excellence.

Another key difference in Foresight policies is the ability to report incidents in real-time. This prevents slow processing that traditionally increases claims. It also helps those in charge of safety protocols handle issues properly. 

Foresight technology puts hard-to-place industries on a more level playing field for coverage. Instead of being cornered by expensive premiums based on a code, they can actively use good safety practices to reduce their costs. 

A Shorter Path to Reduced Workers Comp Costs

Implementing an effective health and safety management plan is a must to keep a workplace safe. It will give employees a sense of confidence that they are in a protected environment. And there’s no doubt that it can help reduce workers compensation costs. 

Here are a few steps an organization can start moving toward a safety tech-centered culture

  • Get commitment from management and employees. Risk reduction needs to be a core cultural element to work effectively. 
  • Assess the current health and safety situation. Review loss history reports to identify areas that need improvement or may be causing a rise in claims. 
  • Evaluate insurance carriers that can use aggregated, anonymized data from safety technology into their rating system. Foresight is currently the only insurance provider (MGU) to offer this technology-led loss control service

Workers Comp that Works for the Employer 

Through the use of technology, safety management and insurance premiums can have a tight relationship. Workers comp policies can then be customized to each employer. 

Companies will have a better handle on their safety and health management, leading to fewer injuries and time off from work for employees. Lower premiums for businesses gives them the opportunity to reinvest that money into other areas of the business. High-risk companies can manage their policies more effectively and at lower costs. 

Safety should impact premiums. Technology makes it possible.

Author: David Fontain

As founder and CEO of Foresight Commercial Insurance, David empowers a world-class team to bring insurtech value to the hard-to-place middle market. Armed with the belief that insurers should improve every business they underwrite, David builds insurance products that streamline dated processes and incentivize safety through the use of technology.