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Compensation Control

Helping employers get a handle on their workers' compensation costs is an excellent way for brokers to add value to their services

Because workers’ compensation (“workers’ comp”) is so closely associated with the social safety net in this country, the vast majority of Canadian employers that pay premiums to the various provincial boards usually think about it in terms of a “payroll tax” or fixed cost of doing business that they are unable to affect in any way. Additionally, in most organizations, the administration of claims and issues associated with workers’ comp has long been the responsibility of the human resources department. The CFO receives the assessment from the board and simply pays it without much thought. As a result, most employers that pay into the government system have become conditioned to regard workers’ comp and the “human risk” it addresses as separate or different from the traditional risk management issues facing the organization.

The same is true for the majority of insurance brokers in Canada, say industry experts that spoke to Canadian Insurance Top Broker. The government of each province is the monopoly vendor for workers’ comp and brokers do not need to be involved in the transaction. Therefore, in line with the mindset of their commercial clients, most brokers similarly give little thought to workers’ comp as part of the portfolio of risk the client needs to manage and are unlikely to ever raise the topic of how those costs can be controlled or the risks associated with it better mitigated.

That mindset has begun to change in the last few years. Increasing numbers of Canadian employers–especially larger ones with hundreds or even thousands of employees that may be paying millions of dollars in premiums to the boards each year–are looking more closely at workers’ comp costs and the associated financial impact from employees being off work for extended periods of time. There is, in fact, a great deal of variable cost associated with workers’ comp premiums. The problem is that there are large gaps in knowledge about how to come out on the right side of that variability. While it may not involve a direct revenue opportunity, brokers can do a lot to add value to the services they provide commercial clients by becoming more knowledgeable about how employers can improve their performance in this area. Key to those improvements is framing the discussion around workers’ comp in terms of human risk and how that fits into an organization’s total risk package.

Government-administered workers’ compensation is Canada’s oldest social program. The first Workmen’s Compensation Board was established in Ontario in 1915, enshrining the principle that workers give up the right to sue their employers for work-related injuries in exchange for guaranteed compensation of accepted claims. Over 84% of the Canadian workforce is covered by some form of workers’ comp, according to the Association of Workers’ Compensation Boards.

Certain classes of employers–usually in low-risk, office-environment industries–are exempt from paying into the system in whatever province they are located (although a goal of some boards is to close that gap entirely in the next few years). Some of those few employers may decide to purchase workers’ comp insurance in any event, and so there does exist a small private market for the product in Canada in which a broker must get involved. But for the vast majority of Canadian employers (and for the purpose of the discussion in this article), the mandatory premiums are legislatively determined, based on the number of employees and the level of risk for their industry or activity.

The Real Cost of Comp

What many employers do not realize is that they can earn rebates and/or be charged surcharges on top of their premiums based on how many claims they have in a year, how severe those claims are, and how those numbers compare to their peers in the same industry group. “There’s real incentive [to be a good performer], and that’s what I think a lot of Canadian corporations haven’t quite got their heads around yet,” says Heather Matthews, vice president of healthcare management services at claims management company Crawford Canada.

The key, says Matthews, is for employers to apply the same principles to managing workers’ comp claims that are applied to managing any other type of claim against a traditional insurance product. What this translates to in practice is having good health and safety policies and accident prevention programs to minimize the number of claims, as well as having and managing effective return-to-work programs to minimize time off work, and therefore the size of claims, she explains.

“You’re still managing a claim no differently than if you had a bodily injury claim from a slip and fall on your premises or a property claim. You want to control the exposure and the indemnity. You want to try and mitigate your loss.”

You’re still managing a claim no differently than if you had a slip and fall on your premises.

After all, the human absence that results from workplace injury can cost an organization even more in the long run than typical physical risks. “If you think of it from a frequency standpoint, how often does a plant burn down? But how often does someone not come into work? That happens on an almost daily basis,” notes Matthews.

“We have clients that have told us that if one person is away, especially on a workers’ comp claim, that costs them about $1000 a day. It’s productivity, morale or hiring and/or training a replacement worker,” she explains.

The systems of penalties for poor performance and incentives for good performance have been in place at most of the provincial workers’ comp boards and agencies for a long time. The problem is a lack of understanding on the part of employers of their financial risk or liability. That’s because the agencies do a poor job of explaining the systems to employers in business terms they can internalize, says Tom Gergely, vice president at Aon Consulting.

“It’s a lack of transparency in the sense that the average employer doesn’t know the math in an already over-complicated system. And we’re not talking about small unsophisticated employers. You could go to some of the largest companies in Canada and they won’t have any idea how to calculate their workers’ comp risk,” he says.

Gergely’s group performs “risk analytics” of employers’ workers’ comp programs to determine the “total risk and opportunity.” As a hypothetical example, on annual premiums of $1 million for an organization with 3,000 employees, the employer might have to pay a maximum of $1.2 million in additional surcharges and be eligible for a maximum of $400,000 in rebates. The total risk in this analytic is $1.6 million, which represents the total variable cost.

Looking Closer

A number of factors are starting to drive Canadian employers to examine these variable costs more closely and ask for help in how to do it. At the same time, risk managers, and not just HR people, are getting more involved in the analysis.

According to Matthews, part of the change in approach has been driven by US companies that have operations in Canada. Because there is no public system of workers’ comp in the US, the risk manager for a US company will handle the issue in that country like any other risk transfer and purchase workers’ comp insurance privately. “That US risk manager rolls human risk into their entire risk management package,” explains Matthews.

By contrast, for a US company’s Canadian operations, our system of workers’ comp can appear Byzantine to the US risk manager. “When it comes to our US clients, they’re even more in the dark” than Canadian risk managers, says Mary Claerhout, Canadian workforce strategies practice leader at Marsh. She notes that some of Marsh’s US clients will request to opt out of the provincial system, unaware that this is not an option. “They wait until they have a huge surcharge from the Canadian compensation boards before they say, ‘I paid my payroll premium. Why am I being charged $180,000 on top of that?’ That’s when we explain to them that this a collective liability system that relies on experience rating and responds accordingly based on your claims performance. We then outline for them all the ways they can take control to influence their own experience and results.”

Another potential driver of change to how employers are approaching their workers’ comp programs is trends in claim activity. On the one hand, between the years 2000 and 2008, the frequency of lost-time workers’ comp claims in Canada dropped steadily by over 20% (from over 392,000 to under 308,000), according to data from the Association of Workers’ Compensation Boards. Over the same period, however, the severity of claims increased by approximately 30%. Therefore, individual employers who are filing lost-time claims have experienced a dramatic rise in the cost per claim.

Most employers would say we didn’t even know there was a maximum or minimum liability.

Matthews points out two demographic factors that help explain the latter trend. One is the aging workforce of baby boomers.

“As we get older, our bodies aren’t recovering [from an injury] as quickly. Now that there’s no mandatory retirement, you have workers over the age of 65 still doing the same physically demanding job that they were doing 30 years ago. Nearly half of the workplace injury claims for workers aged 65 and older result from falls, slips and trips,” a figure nearly twice the share as that for all workers, she says.

Another more unfortunate explanation Matthews offers for the increasing severity of workers’ comp claims is the rise in the number of obese workers. “Their medical costs are higher, their return to work is longer. They usually have a lot of other underlying medical factors that come into play as you try to bring these people back to work.”

Broker Opportunity

Although the broker is not involved with purchasing the workers’ comp insurance product, there is still plenty they can do to help their employer clients with the issue.

“The broker can start having these conversations with the risk manager about their total risk,” advises Matthews. “Instead of just talking about the sprinkler system in their plant, their fleet of vehicles or liability exposure, talk total risk. It includes all human risk, which includes absenteeism like short-term and long-term disability.”

Also key to that discussion is impressing upon the client that workers’ comp is not a fixed cost they are unable to impact. “We’ve actually written a number of documents for our brokers to share with their clients, including Myths and Realities of Workers’ Compensation Programs in Canada–one of them being I can’t do anything about it,” says Marsh’s Claerhout.

The first line of questioning for brokers should be directed towards the goal of getting a better picture of the client’s financial standing with regard to their premiums, surcharges and rebate parameters.

“[Brokers can] ask questions like do you know what your maximum and minimum liability is,” suggests Aon’s Gergely. “Most employers would say we didn’t know there was a maximum or a minimum or how we could impact it.”

Gergely also points out that these conversations will mostly take place with larger employers who have at least 250 or more employees and are paying premiums of six figures or greater. For smaller companies, the economies of scale may not be there to justify paying a large consulting firm to come up with solutions. “If you’re a 100-employee printing company, you may pay $45,000 a year in premiums and in a best-case scenario you can get $6,000 back,” he says hypothetically.

Nevertheless, Gergely says the conversation is still worth having with clients of all size. “A company with 60 employees that doesn’t have a health and safety program might discover it could pay an extra $9,000 if it has a couple of accidents. Now that the owner’s aware of that, maybe he has one of his HR people take on more of a health and safety role focusing on prevention.”

Editor’s Note: This version features corrected information regarding workplace injuries for workers 65 and older.

Three key areas brokers can discuss with employers

Brokers can help their commercial clients gain a better understanding of how to control their workers’ comp costs with a couple of standard inquiries and a considered assessment of how to manage claims, says Mary Claerhout, Canadian workforce strategies practice leader with Marsh.

1. The employer first needs to find out how it is doing compared to its peers in the same rate group. “The first thing every broker should do is ask them if they have copies of their experience rating report,” she says. “I can find it 90% of the time by saying, go to your accountant or CFO. They have them because they’re the ones who get the bills for the payroll premium. They don’t know what it is, they think it’s just a list and it’s in a drawer.”
2. The next step is to ask for a classification review to make sure the employer is classified as the right business. Claerhout describes the case of a recent client that was a non-profit organization providing a variety of services. “Because of the very few small things they do, they were getting dinged as hospice, hospital, things that are obviously very high cost and very high risk. We went in and found out that 90% of their people are doing other things and didn’t belong under those classifications at all.”
3. The most important piece of better performance is good claims management. For organizations that don’t want to retain a third party to do it, Claerhout recommends making sure the in-house claims management person is well trained. “Bring in a company like ours to train your people. Feel confident that your internal person can do your regular claims registration.” The employer can still retain the services of a third party claims specialist on an ad-hoc basis for more contentious or complex cases. “Where you will have to stand in front of a board and the employee on the other side is going to have a lawyer, you want to make sure you have us beside you,” she says.