I met with a contractor not long ago with workers compensation rates that reflected a significant loss history. After inquiring about his claims in the last 5 years, he was adamant that there were none.
Then, after a pause and some reflection, he began to recount a series of small injuries or accidents that had occurred. A twisted ankle here, back pain there, a broken pinky, and so on. He made sure to emphasize that these were not large claims - they were small.
So why the inflated rates?
Well, it's rather simple: claims frequency has a larger effect on your premium than the severity of those claims.
For instance, twenty $5k claims is going to have a larger impact on your premiums than one $100k claim.
Why?
High claims frequency is a red flag. It shows a pattern of poor safety protocols. It increases the likelihood that a big claim is going to come down the line. And, not only that, if those claims are open and overlap, then the reserves set aside will likely be inflated - causing a disproportionate impact on your X-Mod (more on that later).
Here’s the thing: freak accidents happen. They're often called "shock losses."
Carriers can be forgiving when it comes to a large claim that appears out of nowhere on your claims history - especially if you had no other claims, and you carefully describe the circumstances of the loss and your measures taken to avoid it in the future.
What can’t be forgiven? The opaque narrative of poor risk management that an underwriter can read clear as day through a high frequency of small claims on your loss reports.
Here's some steps you can take to avoid high claims frequency:
- Improve or Develop Better Safety Protocols
- Review and update your risk management plan
As a bonus... Here's something you shouldn't do:
Pay those small losses out of pocket
Why?
Well, for starters, it could be illegal depending on what State you're in. Second, what if that employee's "small" injury develops into something far worse over time? If they're past the filing date and Workers Compensation no longer applies, they could be on the hook for a serious medical bill - and they'd have good reason to blame you.
Your best and most effective means of mitigating claims frequency (and most insurance problems) is by getting out ahead of it and being proactive with your risk management. By the time there's an issue, it's often too late to do anything about it. Don't be the business owner that begrudgingly moans about how 'hindsight is 2020.'
Be prepared!
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