Author, Dave Garcia, President, Rancho Mesa Insurance Services, Inc.

Inflation is rampant everywhere, from consumer goods like groceries and gasoline to increased housing costs and labor. Today, I want to talk with you about the specific impact that payroll inflation is having on the workers’ compensation marketplace and ultimately on your premium cost.

Any and all businesses have felt the impact of increased payrolls both to retain existing employees and also to attract new ones. For the sake of discussion, let’s use an inflation wage percentage of 6.5%.

On the surface, this 6.5% wage increase is hard enough to manage on profit and loss statements, but below the surface there is also a deeper impact on businesses that for many will catch them unaware.

The two areas I want to talk about are:

• The impact the wage increase has on temporary disability claim amounts.

• The financial impact that higher wages will have on workers’ compensation carrier P&L’s.

First, temporary disability claim amounts are generally equal to 2/3 of the average weekly earnings of the injured employee. This payment does have a minimum and maximum amount, but for our discussion we will assume the injured worker falls somewhere in between.

So, if the injured worker’s average weekly wage increases by the 6.5%, the disability payment will follow suit. This 6.5% will have several negative impacts. The higher cost of the claim will have a negative impact to the business’ Experience Modification Rate (EMR). 

This can be significant to a business since it will not only directly affect the future year’s premium but if the business is a contractor, an elevated EMR can potentially limit pre-qualification approval from many builders. 

This is so critical to a business success that here at Rancho Mesa we developed a proprietary Key Performance Indicator (KPI) Dashboard that has the capability to tell our clients the actual claim amount per point of experience modification so they can plan accordingly.

An additional consequence of the claim costs increasing is that a company’s individual loss ratio (claim amounts/premium) with their workers’ compensation carrier will increase. Suffice to say as the loss ratio increases, future premiums will need to increase to offset those higher claim costs. Ideally, to continue to receive the most aggressive pricing, we like to see our clients’ loss ratios stay below 30% so these potential inflation increases need to be understood and addressed proactively.

Shifting gears, let’s look at the impact of payroll inflation on the insurance carrier as a business and what impacts it may have on you the business owner as well.

One of the measurements workers’ compensation carriers look to and monitor for their financial health and well-being is their combined ratio. As a general rule, combined ratios measure dollars collected in premium divided by claims costs and overhead. A good combined ratio indicating a profitable and strong company would be in the low 90%’s.

So, logically speaking, if a carrier is experiencing an increase in temporary disability claims costs and an internal payroll inflation of the same 6.5%, which direction will their combined ratios be going? Obviously, it will be going up, so what are they to do?  The most likely choice would be to raise premiums to help offset those increases – unfortunately we know who pays those premium increases.

Now that we understand the impacts that payroll inflation will have on workers’ compensation, what can you do as a business to help mitigate them. The answers are easier than you might think.

This first step is to help reduce the likelihood of claims occurring, thereby reducing the impact of the increase to temporary disability claims on your company.

• Conduct a thorough review of your current safety program and look for ways to improve it. How often are you meeting? Are the trainings current and specific to your needs? Is there a tracking system in place where these trainings are documented? At Rancho Mesa, our Client Services Group works closely with our client teams, drawing from our library of over 3,000 specific trainings to help you create meaningful trainings specific to your needs.

Should a claim occur, what are the steps to help mitigate the impact:

• Report the claim timely – the quicker your insurance carrier is aware of the claim the better the claim outcome.

• Select a carrier that offers “nurse triage” so that in addition to reporting the claim quickly you are able to have an assessment of the injury without going to a clinic and potentially reducing the need for a lost time claim.

• If you have implemented all of the above but still have a lost time claim, offer modified work to meet the injuries work restrictions. By offering modified duty, you are able to either pay the injured workers whole salary or a portion of it which eliminates the temporary disability cost from the claim and/or will dramatically reduce the cost. In addition to these claim cost savings, statistics will show when modified duty is offered the potential for litigation is reduced saving even further potential costs.

To create an active and sustainable safety program, look to your trusted advisor (insurance broker) and see what services they have that can assist you. 

• Do they have a client services team that can provide industry specific trainings, workshops, webinars, certification programs to take your safety program to the next level?

• Are you having regular claims meetings with them to review performance, spot trends, look for root causes?

• What tools are there to assist you in reviewing your claim data?

• Are they able to provide industry benchmarking? 

• Do they have an in-house workers’ compensation claims advocate to assist you with your open claims to create a better outcome?

Payroll inflation is now a reality and not likely to subside any time soon. As we have shared though, there are proactive steps all businesses can take to help mitigate the impact on your workers’ compensation program today and in the future.

If you are looking for assistance in managing through this or have any additional questions, please reach out to us or email me at dgarcia@ranchomesa.com.

Be informed, be proactive, and implement a plan to make your 2022 the best year ever.