There’s a lot of things to know about workers compensation insurance in New York, it’s a big state with a lot of businesses large and small across a diverse landscape, but we’ve picked out 5 THINGS YOU SHOULD KNOW ABOUT WORKERS COMP IN NY, with a special focus on Downstate NY.
#1. You can purchase workers compensation in predominately two different forms.
a. Guaranteed Cost – regardless of your claims during a policy year, the rates are fixed and the only impact to your premium for that policy term will be if your payrolls change for that term.
b. Loss Sensitive Rating Plans – there are three predominate rating plans under loss-sensitive rating plans: Dividend Plans, Large Deductible Plans, and Retro Rated Plans.
Most firms are familiar with Guaranteed Cost insurance. This is how all small and medium-sized businesses are insured for workers compensation. Usually, the minimum threshold for a loss sensitive plan other than dividend plans will be $100,000. Below this threshold, most firms will use guaranteed cost to satisfy their statutory requirement for workers compensation in New York.
Loss Sensitive rating plans use a client’s actual loss experience as part of their rating formula. For the moment, we’ll only talk about large deductible plans since these are the most popular form of loss-sensitive insurance and easiest to explain.
Under a Large Deductible Workers Compensation plan, an insured agrees to pay for each claim it has up to the deductible limit, which in most cases can be $100,000, $250,000 and in very large accounts even higher. The typical guaranteed cost premium threshold to consider a large deductible plan, in my opinion, is $400,000, below that level it might not make sense.
In exchange for assuming the risk of paying for most claims out of pocket, your entry premium is significantly less than what you would be paying for guaranteed cost (GC) insurance. A rough general rule of thumb is that your entry premium is around 55% of your GC premium. The insurance company you engage for a large deductible plan will act as your third-party administrator to pay or adjudicate all the claims, and the price for doing so is negotiated into the contract you will have with them.
Even though you are paying a greatly reduced premium, there are financial obligations which must be understood prior to jumping into a large deductible program. The first is that the insurer will calculate something called a loss pick, and this is the insurer’s best estimate/prediction of what your claims will look like during the policy year. The insurer will require that you post an irrevocable letter of credit (ILOC) for that amount or high as a guarantee that you will pay the claims as they occur. In essence, the insurer needs collateral assurance to back up your claims-paying ability. In addition to the ILOC, you will need to maintain a margin account which the insurer will determine (typically $10,000) for them to draft claim payments from.
As claims occur, the insurer will pay the statutory required amounts to reimburse lost wages and medical bills from the margin account and then ask you to replenish the account. If the margin account is insufficient the insurer may have authority to draft from your checking account to satisfy required claim payments. As the policy comes to a close the insurer will report to you how much has been paid, which claims are closed, and which ones remain open and this is where it gets sticky. Those open claims present a future liability to you and the insurer. To secure those open claims the insurer will demand that some or all of your ILOC remain open, probably not a problem until the renewal terms come around which will require a refreshed ILOC for the next year’s claim obligations.
As you can see, this can be a complex form of workers compensation, but for firms with an established risk control program, good loss history, sufficient free cash flow and an appetite for risk, a large deductible (or other loss sensitive rating plan) may be a good option to consider.
One bit of advice for any firm considering a loss sensitive rating plan. Before jumping into it, we recommend hiring your own independent actuary to review your options and give you an unbiased opinion of what the ultimate costs will be. While an actuary’s report is no guarantee of your actual results, it can serve as a highly qualified opinion that’s better than a “gut-feeling” when making this leap.
#2 – Claims have a dramatic impact on your costs
As described in this article claims will have a dramatic impact on the costs you pay for workers compensation insurance in two ways. First, your rates will reflect the underwriter’s appetite for your claims experience. The underwriter’s primary pricing tool for determining your premium is the insurer’s loss cost multipliers or LCM. Better than average or expected claims history will get you a more competitive LCM and lower final rate; higher than expected claims history will get you a less competitive LCM and a higher final rate.
It’s not difficult to understand that an insurer doesn’t like paying out claims so if you have more claims than the expected rate of claims you’ll pay more in base rates.
The second way you pay more for poor claims history is in your experience rating modifier; also discussed HERE. The experience rating mod is your company’s specific loss history expressed as a multiplier in the rating calculation. A debit modifier indicates that your loss history is higher than the expected while a credit modifier is the result of lower than expected claims.
Controlling claims is paramount to controlling workers compensation costs.
#3 Businesses in NYC face another rating complexity – Terrorism.
While the U.S. and NYC, in particular, have thwarted and prevented most terrorist attacks, terrorism is still a concern for insurance companies. In fact, part of the underwriting process for any account in NYC and other major cities in the United States will have a terrorism component. The major concern for insurers is twofold; a. is your firm located in or near a potential terrorist target (such as Grand Central Stations, The Empire State Building, or World Trade Center, and others), and b. how many employees are concentrated in or near one or more of these targets.
Being in or near a terror target does not automatically force an underwriter to decline your account, but due to limited availability of reinsurance it may force an underwriter to obtain special reinsurance for your account (at an additional charge) or you may pay higher rates for workers compensation.
#4 – Contractors have a difficult time with workers compensation in New York, especially if there is a height-related exposure. This is due to the odd labor laws only found in New York (of course), which makes most insurers avoid insuring many contractors for workers compensation.
#5 – Giving your policies to 2 or 3 brokers to “shop the market” may be the worst way to reduce workers compensation costs.
This may sound odd or contrary to popular opinion, but the simple fact is that when you have two or three insurance brokers out in the marketplace competing for your business no one is going to win.
You may ask: WHY?
Because this traditional shopping exercise does not typically address all the underwriting factors which will influence the final price you pay. Here’s why. In the past, most insurance brokers only represented a handful of insurers, out of a very large field of players. Today through consolidation there are fewer brokers and fewer insurers in New York writing workers compensation. Many brokers will represent most of the major players, in fact, a much higher percentage of all the players than just 15 or 20 years ago. Since each insurer will only work with ONE broker at a time, chances are good that if you engage two or three brokers they will all be going to the same insurance companies. This is problem one. When two or three “submissions” of your account land on the desks of an insurance company two things happen. The first is that the underwriter has to tell the other two brokers that broker #1 got there first and their submissions are declined unless they can obtain an “agent of record or broker of record letter” from you. You are probably experienced with this drama as the blocked agents now come crawling to you on their hands and knees pleading for you to sign this authorization letter. The second thing that happens is that the underwriter senses that you are only out shopping for the best quote and are blanketing the marketplace. This isn’t necessarily a “bad thing” but it changes the attitude of the underwriter from a state where they may have had an aggressive attitude to now turning tepid. In fact, if they look in their system and see that your account comes in for quote regularly (every year, or every couple of years) it’s likely that the submission will go to the bottom of the pile. You’re labeled a “price shopper” and with limited time and resources the underwriter moves onto opportunities/deals, they feel they have a better chance of winning.
The other problem with this traditional process is that most brokers are submitting your application and loss runs as their “submission”. They blanket this submission to all their underwriters with the hope that someone will say yes, and give the broker a great proposal of them to bring back to you to win the deal.
Unfortunately, the world is not that simple. In order to achieve the best results in a complex market, a broker cannot simply think that loss runs and applications are sufficient to win a big deal. They need to showcase everything you, as the insured, are doing to prevent claims and manage risk. If you’re not doing that, it may be best to create that risk management system BEFORE going out to the market place.
The simple fact is this: Average accounts will get average pricing. Great accounts which are sold to underwriters using a systematic “top of the pile” type of submission will get great results. If you fit into that “average” category, don’t give up. We can show you how to be extraordinary to achieve great results. It may take time, but the payoff down the road can be hugely significant.
If you’re not sure if your broker is accessing the market on your behalf with a top of the pile submission or cultivating your risk control program to achieve maximum results, then maybe you’ve outgrown your broker. Looking for a change? Want to talk about it?
Here’s the bottom line, not every insurance broker is a great fit for your business when it comes to workers compensation insurance. The larger your firm, the higher your premium, or the greater the risks of worker injury are probably will demand that you hire a broker with unique skills and understanding of workers comp, risk control, and how to manage claims. The Coyle Group has those skills and frequently we will work with clients to help them better understand the risks they face and how to control them, so they can control the long term cost of insurance and their total cost of risk.
Want to learn more? Contact us at 845-634-3606 or email me: Gordon Coyle at email@example.com