Inflation isn’t just affecting the price of materials and employees’ wages. It is also predicted to impact workers’ comp costs as rising expenses are impacting it on several different levels.
“Insurance carriers are having to offset that potential cost into their premium so we think by 2023 we’ll start to see the impacts from those issues,” says Drew Garcia, VP of Rancho Mesa Insurance Services.
When insurance carriers determine a company’s premium, they look at the potential medical costs as well as the lost wages an employee will collect while on temporary disability. Increased costs for medical treatment and wage inflation for both landscape companies and the carriers themselves are all creating upward pressure on workers’ comp rates.
Carriers use a combined ratio to see how much money they collect from premiums goes toward claims and overhead. Ideally, this ratio should be below 100 in order for them to make a profit.
“If a carrier’s combined ratio goes over 100, let’s say it goes to 105 then for every dollar they collect, they’re paying out $1.05,” says Dave Garcia, president of Rancho Mesa. “That carrier is either going to go out of business or they got to raise the price of their product.”
Dave Garcia says wage inflation is a perfect storm because as landscape companies have to pay employees more to remain competitive, the cost of their lost time claims will increase and carriers are experiencing their own payroll inflation which drives up their overhead costs.
“Some landscapers may say, ‘Oh, I haven’t had a claim in five years. So it doesn’t affect me,’” Dave Garcia says. “But that won’t be the case as all companies will experience a hardening marketplace. All companies will be impacted regardless of individual losses since insurance, by definition, is a spread of risk among all businesses.”
Drew Garcia says most agents and brokers are communicating this potential rise in workers’ comp costs to their clients.
“Sometimes you don’t hear what you’re being told because you’re not feeling the pain yet,” Drew Garcia says. “They could be telling them ‘Hey, we think there’s some turbulence. We think the workers’ comp market could stiffen up.’ But when you’re conditioned to seven, eight years of rate reduction on workers’ comp, you’re kind of numb to what you’re hearing and tend to dismiss it.”
Preparing for the Rise
Workers’ comp rates are cyclical in nature. What is unknown is whether the curve will be a U- or V-shape, depending on how gradually or sudden the changes are.
“The rate for workers’ compensation across the country has been, in insurance terms, soft for several years meaning the rates have come down,” Dave Garcia says. “For example in California, the rates over the last 10 years have decreased 50 percent of what they used to be.”
If the uptick in workers’ comp expenses is gradual, then the cost can be absorbed but if the curve is V-shaped most businesses aren’t prepared for those sudden spikes.
“If your claim costs are out of control, and you head into a harder market, you’re going to really feel it so now’s the time to change,” Dave Garcia says.
He says while the industry is probably at the bottom of the soft market and rates will go up, there are ways to keep costs under control.
By focusing on safety, you can keep claims from occurring in the first place. With a soft market, company safety programs may have gotten stale because owners aren’t seeing a direct benefit.
“I would encourage any business even if they got a strong program, just do a self-evaluation of it,” Dave Garcia says.
When claims do occur, having firewalls in place such as a strong return to work program and nurse triage can help mitigate additional costs.
“I think people are starting to create stronger return to work programs,” Drew Garcia says. “We’ve seen a turn in that last six or seven years as more people understand the benefit of a return to work program and accommodating injured workers with restrictions so that they’re back for work and not collecting temporary disability.”
Carriers look at your claim history when underwriting your company and they will evaluate how strong your return to work program is and on how many lost-time claims you have.
“I think return to work is really critical,” Drew Garcia says. “NALP does a great job with the content they have in the safety program to help people organize that program.”
Another element you can control to drive down claim costs is through proper claims management. Dave Garcia says companies such as Berkshire Hathaway handle claims at a very high level and statistically have shown that they close claims quicker and at a lower dollar value than the average carrier.
“When you choose the carrier to partner with make sure you are evaluating that carrier beyond just the premium they are offering and really look into the services they offer like claims handling, medical cost containment performance, nurse triage, telemedicine, and loss control services to help your business,” Dave Garcia says.
When injuries occur, reporting them immediately to the carrier can make a major difference as well.
“It’s statistically shown that you want to do that within the first 24 hours or at least within the first three days because the ultimate cost of that claim will be less,” Dave Garcia says. “If the claim is reported after the 5th day, the chance of that claimant getting a lawyer and adding litigation to the claim goes up about 300 percent.”
Even the landscaping companies who only have had two claims a year for the past five years should be thinking about how can they get that down to one claim a year.
“How do I have one?” Dave Garcia says. “How do I have none? That’s the piece that a business can control, their own experience.”
Instead of renewing your policy a few days before it expires and being blindsided by significant increases you did not budget for, start the insurance renewal process early on.
“It seems like insurance sometimes can get treated as a last-minute thing and kind of forgotten,” Drew Garcia says. “There’s no process behind insurance and renewal. It’s really important to start that renewal process 120 days before your policy expires. That means having conversations with your agent about the market and allowing them to give you a little insight on future costs and budgeting so that you can start working that into your numbers and offsetting that potentially with your customers.”
Dave Garcia admits that this workers’ comp cost increase is not a given as everyone’s crystal ball has a little bit of snow in it, but this has been a topic of discussion at several workers’ comp councils he sits on.
“If I’m off on my prediction and the market doesn’t harden, and all you’ve done for the last year is prepare for it to happen you’re in a better position anyway,” Dave Garcia says. “You’ve made your company safer.”
NALP’s safety programs are produced in partnership with Rancho Mesa.