With extensive regulation on both the rating and claims sides of the business, the ability to differentiate between applicants for better risk selection is a huge challenge for workers' compensation insurers.
Compounding the problem is the scant information available about the insured to base decisions on. That information—usually provided by the applicant or an agent—is unverified by an independent source.
Insurers are in the dark
Until now, the best practice has been to perform an audit to confirm information about the business—which may not happen until a year or more after the account has been on the books. By that time, the account may be incurring costs from unidentified exposures.
As a result, for a full year the risk estimate is effectively a best guess that may lead to premium leakage or, worse, fail to identify fraud. Far too often, insurers underwrite and price workers' compensation policies blindly.
There are two fundamental questions about an insured that always need accurate answers. They may seem simple and straightforward to anyone unfamiliar with the process:
- How many employees does the insured have at the location?
- What’s the actual business function of the company?
Regarding the first question, employee headcounts typically come from the insured or agent. That number is perhaps the foremost driver of exposure and rates. Because accuracy is so essential and the number so critical, no insurer should rely solely on an agent’s estimate or a potentially insured-friendly lowball number.
The answer to the second question is more complex. Governing classifications are intended to represent the normal activities of a particular business operation. Let’s say you’re insuring a storefront baked goods shop. You’re probably depending on the Standard Industrial Classification (SIC) business code the agent provided to identify the property and the insured’s use of the property to determine potential risk. But as precise and exacting as the codes seem, most businesses have an associated use that could dramatically change a loss cost and workers' compensation risk.
What’s in an SIC code?
For example, the insured gives you a SIC for “bakers-retail.” But you still have more to consider. Does the business limit itself to selling baked goods? Is any baking done on the premises? Is food prepared and consumed at the location, as in a café, for example?
Nineteen percent of businesses in the bakers-retail SIC code have an aligned classification of “restaurant.” Baking, cooking over an open flame, making coffee, and serving customers all present more exposure and risk for workers' compensation purposes. That warrants asking the insured additional questions.
Getting Workers' Compensation right
Verisk has an insightful web seminar that explores these challenges and offers solutions: Workers' Compensation: Why wait until premium audit to get it right? The on-demand seminar explores how to significantly reduce premium leakage and avoid the need to wait until renewal time—or when a claim is filed—to identify hidden risks.
Additional topics covered include credit, payment metrics, injuries and fatalities, OSHA reports, hazardous oil and chemical spills, and the value of obtaining field-verified property characteristics and photographic proof of observed occupancy-related hazards. All of this can help paint a better picture of the operations and its management.
Sanford Brown is director of product development at Verisk Insurance Solutions and can be contacted at SBrown@verisk.com