Who Says Loss Control Doesn't Save Money or ... Look What They've Done to My Rates Ma!

Robert D. Wurtz, CPCU

We have discussed the importance of loss control for overall cost savings to our counties for several years in several articles. This year would seem to stand as an excellent example of the message we have been trying to convey.

Not only have rates for the most common codes used for rating the worker's compensation coverage for Wisconsin counties dropped significantly but the average experience modification for counties in the Wisconsin Counties Association endorsed safety group has dropped significantly this year resulting in a savings of over twenty percent over the actual costs paid last year.

Table 1 below shows the base rates for the most used codes for Wisconsin counties. Code 9413 is for most municipal operations payroll, code 8810 for clerical, code 7720 for sheriff's department payroll, and code 5507 is for highway construction.

As can be seen from the table rates for the municipal operations code, code 9413, have dropped over 13 %, code 8810, 10 percent, code 7720, 10%, and code 5507 a whopping 22%.

On top of these results, the weighted average experience modification for the WCA group has dropped over 5% allowing the real costs for workers compensation for counties participating in the Wisconsin Counties Association Safety Group to drop almost 13% despite an average payroll increase of approximately 5%.

The fact is, rates for counties in these codes for the last five years have been fairly steady or decreasing slightly. The rate for the municipal operations code took a slight jump, about 5%, in 1994 and less than 1% in 1995 but current rates are as low as they have been in five years, in some cases significantly lower. Code 5507 has been over $8.00 for several years and code 7720, for sheriff's operations was $5.53 in 1993 (that is a drop of over 44% in just three years).

What accounts for these amazing improvements over the last few years? What has changed?

Well, several changes have taken place over the last few years. One of the biggest has been the increase in the number of self insured counties since 1988. In that year, fifty-six counties purchased insurance in the open market. Since then, thirteen additional counties have switched to self insurance. This has been primarily the larger population counties but not in every case. Evidently, many of these counties chose self insurance because of their own high costs of insurance and took much of the loss results affecting the rates for all counties with them. But this cannot account for all the change.

The average experience modification for counties within the Wisconsin Counties Association Safety Group, twenty- seven of the total of the forty-three counties that are currently insured with standard coverage, has been consistently dropping. Another major change has been who these counties have been insured with.

In 1987, the majority of insured counties were with a single large Wisconsin domestic commercial insurance carrier. As far as we can reconstruct, approximately forty counties of the fifty-six insured at that time were with that carrier. Since then, as we said, thirteen more counties have gone self insured from that point and twenty-seven have switched to the Wisconsin Counties Association Safety Group, formed in 1989. Many of these counties had to come out of that carrier's book of county business.

When so many insureds of one particular industry or governmental group, such as counties, are with the same carrier in a state, the claims reserving procedures and loss control effectiveness of the carrier have a tremendous effect on the overall rate of all insureds in that group. A carrier controlling that much of the business may not have any incentive towards strong loss control efforts because higher loss results for the overall group results in higher state rate levels and more profit and overhead dollars (these are percentages and the same percentage of a greater dollar amount results in greater dollars). This can result in rates increasing regularly and many members of the group finding self insurance, were they control their own loss prevention efforts and reserving practices, an attractive, if risky, alternative.

To demonstrate how such a carrier can actually use reserving procedures to artificially buoy rates up, consider that when a carrier sets higher reserves on a long term case and does not reduce them in a timely basis (roughly during the three years of the rating formula period) those reserves are used in the rate making for the state. If one carrier has most of the insureds whose loss experience goes into those rates they make most of the unit statistical filings that go into the rate making function. If they hold these higher reserves open longer, the filed rates will be higher.

The higher rate level established by this practice can be used to pay dividends and acquire profit. The dividends paid to a safety group which is the result of a concentration of business such as we have described theoretically cannot continue if the rates are increasing because the rate increases should be the result of poorer loss experience. If these poor loss results for the group which the carrier controls are the result of actual poorer than expected experience, then there should be no profits from the deteriorating results to pay profit with.

This, of course, changes if the loss results improve and continue to improve, and reserving is adequate but not redundant. Theoretically, these improving results and generally reducing rates, since the rates reflect loss results from between two and four years prior, can continue to allow this kind of carrier to stay ahead of the curve. They can pay the difference between the better actual experience and experience contemplated in the rates to their participants in real dividends based on those better results.

As we have said before, only better loss results can decrease your workers' compensation costs. Evidently, that is what counties have been doing for the last few years with the new concentration on loss control within the safety group membership. Savings to WCA Safety Group participants just in 1996 amount to conservatively over $630,000 before dividends. Tell me now, did we steer ya' wrong?