It Has Been Difficult To Accurately Measure Indirect Workers Compensation Costs – Until Now
It has been my experience that accountants and financial managers are extremely effective at measuring the various components that go into the manufacture of a product or delivery of a service, particularly when it comes to measuring “added value” at each stage of a manufacturing process, or service delivery. This effort is focused primarily on the quantification of various components of productivity (P) that ultimately generates an operating profit. Unfortunately, traditional cost accounting struggles with the measurement of what I call a company’s Resource Quality (RQ) and has even more difficulty measuring the dynamic trade-offers and interrelationships associated with balancing a company’s P and RQ.
As a result, they use worker compensation premium and their experience modification as the way to measure the cost of worker injuries in the workplace. Workers compensation premium is clearly an easy measuring device. This premium is a function of your company’s audited payrolls, insurance rates by classification code, the workers compensation experience modification, and the competitive nature of the workers compensation insurance marketplace. In reality it is based upon expected losses that that the insurance company expects to pay over the course of the policy term. The fallacy is that your workers compensation premium only addresses the insured cost of workers compensation injuries and fails to accurately measure your indirect workers compensation costs. Never forget that workers compensation premiums account for approximately 1/3 of your total workers compensation costs.
Your workers compensation experience modification is a method used to recognize past loss experience when calculating your insurance premium. Your “experience mod,” as it is commonly called, is actually a statistical formula that compares your historical loss experience to your industry peer group. If your “experience mod” develops a 20% credit (indicated by a .80 experience modification), then you will pay 80% of the manual premium. On the other hand, if you have a 20% debit (indicated by a 1.20 experience modification) you will pay a surcharge of 20% above the manual premium. Your experience modification is calculated by using three (3) years of loss experience, with the current year not counted in the calculation. It is very important that you understand that an individual workers compensation claim will be included in the calculation of your workers compensation experience modification for 3 years, and can be quite costly. There is no question that the workers compensation experience modification is an important component in calculating your insurance premium, and does provide an excellent benchmark to roughly compare your safety performance against your industry peer group. However, the factors that go into its calculation are still only insured costs. As such, it also fails to address indirect workers compensation costs and, as a result, the total cost of worker injuries. So, let me ask you the following question:
Are You Comfortable Making Financial Decisions Based On Only 1/3 Of Facts?
In talking to business owners and financial managers throughout the
CompEraser comes with on-line, on-demand resources needed to develop and implement an effective safety and health program. These resources include injury prevention, OSHA compliance, safety training, prompt injury response, workers compensation disability management, plus more. These resources are available 24/7 and used irrespective of which workers compensation carrier you select. Its patent-pending technology also provides unique financial reports for monitoring the effectiveness of your safety and health program on an on-going basis. For more information visit our website at www.CompEraser.com.
