Workers' Compensation Best Practices - A Beginners Guide
The drafting of this article comes on the heels of yet another national workers' compensation carrier, previously with a very favorable outlook on the PEO industry, downgraded and facing regulatory review. When all is said and done, only the well managed PEO will survive the current hard market cycle. While economics could be a factor, it appears one PEO has created problems for their entire risk portfolio. This should serve as a wake-up call to all of us. The days of growth at any expense are ancient history.
The evolution of these best practices will be a continuing effort and now the task force is focusing on developing an educational campaign that will touch PEOs and insurance carriers alike. A journey and not a destination! The "Best Practices" lay the framework for a successful risk management program, albeit not the panacea that we aspire. This article will delve into some of the specifics of a successful program. As such, special attention will be given to the areas of risk assessment, loss prevention, and claims management. While certainly not comprehensive, these talking points should serve as the starting point for a successful risk management program.
The single most daunting challenge a PEO risk assessor faces is the onslaught of lobbying initiated by the sales infrastructure of the PEO. The politics are immense and frequently the decisions made by a risk assessor are cast aside in favor of today's dollar. Over the past year, we have had the opportunity to interview a number of professionals representing the insurance markets. Without fail, the one question always asked is: "Who is in control of the final decision process?" If your risk management department does not control the ultimate decision, your odds of acquiring coverage or maintaining a carrier relationship are remote. Without diminishing the importance of the aforementioned, there are several steps a risk assessment department should take to properly evaluate a risk. The initial source for gathering information is often the PEO's pricing request form. If you do not have one, you may wish to consult with your broker or agent to obtain a standard insurance industry document and use it as a guide to develop the sections of your own pricing request form that relate to the client's impact on your PEO's insurance costs. The risk assessor must "evaluate" each and every prospect focusing on employee count, wage levels per employee, workers' compensation classification codes, experience modification factors, prior coverage, and total workers'compensation premium. There are several sources of information to assist the risk assessor in meeting these objectives. The National Council on Compensation Insurance (NCCI) is the repository for a great deal of information, including the "Basic Manual," "Scopes Manual," and experience modification factors, which all are available for purchase. If you have not already, we encourage you to visit their Web site at www.ncci.com.
However, the PEO must develop its own pre-approval and exclusion list and not rely on the carrier to provide these guidelines. The pre-approval and exclusion lists will establish the industries the PEO will not write under any circumstance and those that will require extensive review before allowing the client to run payroll. Keep in mind, these lists are absolutes and must not be ignored or manipulated without carrier approval. Also, if the PEO would like to pursue an exception with a carrier, the authors suggest selecting only those who truly are exceptional and document a case for presentation. Unfortunately, the fact that the client will generate a large payroll or a significant administration rate will not be enough to sway the carrier. While often a sore point with the PEO's sales staff, three to five years of currently valued loss runs should be obtained from every prospect. This information must be analyzed on a year-over-year basis to determine trends in frequency or severity. We also recommend that the PEO develop a profitability model for every prospect and client. Projected workers' compensation losses, developed to ultimate cost, should be built into the model to reflect anticipated cost. Obviously, businesses with adverse trends should be thoroughly analyzed, including a site visit by a safety professional, to determine whether the client has taken steps to address worksite exposures. The commitment of the client's management toward the welfare and safety of each employee, including the willingness to make a monetary investment, is of critical importance. Finally, the new client package should be monitored to assure consistency with the initial proposal. Too often, this information varies significantly from what was initially presented for review.
For larger PEOs, an in-house risk assessment department can achieve most of these tasks. Other PEOs should work with their insurance agents or brokers to develop policies and procedures and assign responsibilities. In any event, it is imperative that the PEO formalize its process in writing and distribute it internally. The PEO should also develop standard forms to meet its needs and use them exclusively. All information obtained by risk assessment during the analysis process should be retained for later review or use.
Safety professionals should be responsible for assessing and approving high-risk prospects and maintaining all existing clients. Too often, they become glorified sales representatives. Among other things, their responsibilities should include worksite inspection, workers' compensation classification review, safety training, and accident investigation. These responsibilities can be administered by a PEO employee, insurance carrier representative, broker, or outside consultant. The number of corporate employees necessary for these tasks varies depending upon proximity of the client base, mix of business, claims history, and array of services offered.
The PEO should develop standardized forms for use, including formalized policies and procedures, to assure consistency in presentation. It is important to note at this point, the PEO should establish that the services it provides are as a consultant. Moreover, this should be reflected in any materials provided to the client. OSHA has consistently held the worksite employer responsible for any safety violations. It does not benefit the PEO to muddy these waters. Also, with the development of technology, digital cameras can provide immeasurable value through immediate access to pertinent information.
Safety professionals should prioritize their time to maximize effectiveness. Attention should be given to clients who represent the upper quartile of exposure. Action plans should be customized to address the immediate needs of these higher risk clients. Results should be monitored frequently and, ultimately, a termination notice may be necessary. Claims Management
The role of the PEO in claims management is to provide oversight over the carrier or third party administrator managing claims, but not to bully them over claim reserves. The PEO claims manager should also act as a liaison with the client to help injured employees return to work successfully. This individual should possess claims adjusting experience, preferably with a carrier. From the perspective of the authors, the claims intake process should be administered by the PEO. When the claim is reported, the PEO representative should verify employment, ensure proper classification, complete the First Report of Injury, direct the employee to a network provider (in states where applicable), and notify the PEO's safety representative. Once the claim is reported, the PEO must let go of the claim and allow the carrier to do its job. The PEO can make a significant difference in the area of return-to-work. Working with the carrier and the vast inventory of PEO clients, the claims representative may be able to find suitable employment for an injured employee with job restrictions. This process must be formalized and should be part of the client service agreement. There are as many models as there are PEOs, but the key is to find what works for your organization. Some carriers have created job banks or relationships with charitable organizations to find opportunities for these employees.
The claims administrator should work with the worksite employer to assure prompt reporting of claims. Statistics show the cost of a claim goes up exponentially with each day of delay in reporting. The claims manager should work to make sure an injured employee's needs are being filled as soon as possible so the worker may return quickly. It is often helpful to develop a process that educates the worksite employer on its responsibility in timely reporting of claims. Letters could be drafted to "remind" those clients with chronic reporting issues. It may even be helpful to have a PEO representative visit the worksite employer in cases where previous efforts have not helped.
The Final Word
While the insurance markets are certainly experiencing some turmoil, there are still markets receptive to writing your insurance coverage. There are also several "out of the box" alternatives being discussed and developed even as we speak. Some include individual client level underwriting by the carrier while others may contemplate outsourcing the PEO's risk management function. Each PEO must assess its own situation and be receptive to change. But one thing is certain; the world in which we all have prospered has changed.