Workers Compensation Buyers Guide: 5 Key Considerations for Staffing Company Owners and Insurance Agents 2011 Artex Risk Solutions. All rights reserved.
Table of contents About This Guide... 2 Five key considerations for your workers compensation program: #1 Carrier Ratings Matter, Don t They?... 3 #2 Stability and Commitment to Staffing Firms should be Position A in the Buying Process... 4 #3 The Workers Compensation Classification System and Staffing Companies... 6 #4 Staffing Companies and Experience Rating Modification Factors... 8 #5 Three Simple Benefits of Working with Artex on Your Staffing Firm Workers Compensation... 12 About Artex Risk Solutions... 13 Frequently Asked Questions... 13 Contact Artex Risk Solutions: The Staffing Firm Specialists... 14 1
About This Guide Staffing company owners and their insurance agents are exceedingly aware of the importance of workers compensation, yet many are confounded by its ever-present complexity. While market conditions have softened during the past several years, the issue of stable, reliable coverage has tested even the best staffing firms. Under the Borrowed Servant doctrine, staffing companies take on a unique role as an employer providing labor on a contingent basis to the many clients they serve. Whether placing workers on a short-term or long-term assignment, staffing firms DNA is based on an employment relationship. Of course, fundamental to the role of an employer is the statutory requirement to provide workers compensation coverage for its workers. Central to the success of all staffing companies is the administration and management of their workers compensation program, particularly given the fact that workers compensation can be one of a staffing companies single largest cost of goods sold. Artex Risk Solutions has been a Program Administrator for Zurich American Insurance Company, for nearly 15 consecutive years. Zurich s financial ratings 1 are among the strongest: A.M. Best A+ (superior).* We ve designed this buyer s guide highlighting five key considerations to help you more effectively secure and manage your workers compensation program. We have listened to our clients and designed a workers compensation platform distinctively positioned to help meet your unique needs. We hope this buyer s guide is a beneficial resource for you, the staffing company owner and/or agent, and we look forward to putting our expertise to work for you. 1 As of November 2010; for information about the ratings of Zurich American Insurance Company, see the ratings section on www.zurichna.com. For more complete financial information about the Zurich Financial Services Group and ratings for Zurich Insurance Company, access www.zurich.com. 2
Consideration #1: Carrier Ratings Matter, Don t They? Staffing companies are savvy insurance buyers. They understand the critical importance of the relationship they forge with their workers compensation carrier particularly the downstream credibility that teaming with a blue chip carrier can mean as they market themselves to businesses. As a Program Administrator for many alternative risk and complex group insurance programs, Artex only works with those insurance companies having a high A.M. Best rating. We have worked with Zurich American Insurance Company for 15 years in the staffing industry. Click here for their current financial highlights. Throughout the years, a number of poorly-rated insurance companies have failed, leaving staffing companies in the lurch. In fact, in early 2010 two unrated carriers that focused on the staffing and PEO sectors were taken over by the Oklahoma and Georgia Departments of Insurance and deemed insolvent. Choosing a strategic workers compensation carrier can and should include a detailed understanding of the carrier s A.M. Best, Moody s and Standard and Poor s ratings. Financial ratings by these organizations are designed to inform the insurance buyer of the carrier s underlying financial stability and longer-term outlook, and are available on-line and through most insurance agents. Though market conditions have been soft for the past several years, most industry experts suggest we are at the trough of the market cycle, and a flight to quality is occurring in the staffing industry. Your carrier s underlying rating is becoming an increasingly important part of the buying decision. 3
Consideration #2: Stability and Commitment to Staffing Firms should be Position A in the Buying Process The importance of a workers compensation carrier s underlying ratings is a critical factor in choosing a carrier, yet there s more to the buying decision than just rating. A commitment to the staffing industry and staying power is also of paramount importance. As staffing firms and their agents examine a carrier s commitment to the industry, the following key questions emerge on which we ve provided insight: 1. Can the carrier provide a list of long-term client references? Do you, the agent or staffing firm, see yourself aligned with that carrier? Would you consider the other staffing firms that are written by that carrier to be peer group companies or inferior? It s important for agents and staffing firm owners to know their carrier is serving the needs of similar peer group companies, and it s particularly important for the carrier to have been in the staffing space for a long period of time. This demonstrates longevity through the inevitable market cycles. Most importantly, find out what current insured staffing companies have to say about the carrier s service platform and staying power. 2. Does the carrier have adequate underwriting bandwidth in terms of states and class of business they can write to support your growth? Many smaller, regional firms, as well as unrated or poorly rated carriers, have serious limitations in terms of the states in which they are allowed to write. Though many staffing companies operate within single-state boundaries, your having to say no to a potential client because your carrier doesn t have full interstate capabilities would be a shame. 3. How does the carrier s marketing brand awareness connect with the staffing firm s brand image? Does it epitomize a blue-chip relationship or something less? For many staffing companies, aligning with a well- respected, well-known workers compensation carrier is critical to their success. Increasingly, Fortune 1000 companies risk management departments are requiring staffing companies to have the very highest A.M. Best rated carriers behind their insurance programs particularly for the workers compensation line of business before they will accept placed workers from that staffing company. The reality is that there is a direct quality relationship drawn between the staffing company and a key vendor, such as its workers compensation carrier. 4
Stability and Commitment to Staffing Firms continued 4. Understanding a carrier s commitment and stability within the staffing firm space is often rooted in its internal corporate structure. Ask and understand: a. Does top management support the carrier s presence in the staffing firm space? Over many years and through various market cycles, Artex has witnessed carriers ebb and flow into and out of the staffing space. Understanding the carrier s long-term view is a key to stabilizing your plan. b. Does the carrier rely on reinsurance to support its staffing firm underwriting activity, or does the carrier assume the risk net, or absorb the risk itself? When a carrier relies (heavily or not) on reinsurance to be in the staffing firm industry, their long-term presence/commitment may well be at odds with the position taken by the reinsurer. In harder market cycles, we find reinsurers have traditionally pulled back from providing support to temporary services firm workers compensation. This leaves a dearth of coverage for the unsuspecting staffing firm. As you investigate workers compensation alternatives, it s worth asking the question, How reliant is the prospective carrier on reinsurance? 5. Does the Program Administrator or carrier have the internal infrastructure to handle the unique ebb and flow payroll reporting characteristic of staffing firms, and how adept are they at handling the corresponding audits? Unlike traditional four-walled businesses, staffing firms are multi-dimensional and often have many class codes and broad shifts in the payroll they process. Traditional workers compensation billing and audit paradigms often lead to protracted audits, delays in unit statistical data filing, and uncertainty about the current period s cost of coverage. A program that supports the dynamic tracking of payroll and classification data for staffing firms is unquestionably a critical success factor to look for. This kind of infrastructure facilitates the staffing firm s audit process and frees up staff to manage revenue-producing initiatives as opposed to becoming mired in burdensome audits. 5
Consideration #3: The Workers Compensation Classification System and Staffing Companies It s a given that staffing firms are far more dynamic than the static workers compensation class codes found on most policies, since staffing firms are in the business of placing workers with various companies, often in a myriad of industrial sectors. These inherent realities call attention to the need for accurate classification of workers early in the process versus at audit time. Clearly, material reclassifications to higher classes can be problematic, as the staffing company oftentimes can t go back to their client and issue billing changes. A brief primer on classifications should prove helpful. At its roots, the NCCI and various workers compensation rating agencies have established classification systems as a standardized baseline for the accurate collection of data, so that the cost of workers compensation insurance can be distributed as equitably as possible. To do that, the classification system is designed to divide payroll data into specific industry groups in order to match the premium that you pay to the average potential risk of injury relative to that industry. Classifications within those industry groups reflect the risk characteristics central to those businesses, and are often known as the basic classification or governing code. For all employers, and especially for staffing firms, it s critical to underscore NCCI and all other rating bureaus fundamental tenet of classification: it is the business that is classified, not the individual placed workers, occupations, or operations within the business. In certain circumstances, the use of a code outside of the basic classification is warranted. For instance, some jobs are common to such a large majority of businesses that special classifications, known as standard-exception classifications, have been established. Employees performing work applicable to a standard exception classification are coded as such, if they meet the criteria in full for the standard exception code. If the criteria are not met in full, then the employee(s) falls under the highest-rated risk to which they are exposed. The four standard-exception classifications are: Clerical office or Drafting Employees (code 8810); Clerical office or Drafting Telecommuter Employees; (code 8871) Drivers, chauffeurs, and their helpers (code 7380, note: not applicable in AZ, CA, NV) Salespersons, collectors, or messengers-outside (code 8742). Note: Automobile salespersons are separately classified to code 8748 Because employees coded in standard-exception classifications are common to many businesses and lower rated, these codes are typically the most misused and have drawn the scrutiny of regulators to the staffing and PEO industries. The concept of governing code is vital to a successful risk management program for staffing companies providing labor to various businesses. Artex has found that a granular understanding of clients operations (both at the outset and ongoing), along with a detailed job description of the placed worker s duties, leads to better classification and fewer surprises at audit. What could be worse for a staffing company than having to go back and attempt to collect additional amounts from a client (that may even be gone) because the coverage was not properly classified? 6
The Workers Compensation Classification System and Staffing Companies continued There s economic incentive for the staffing company to vigorously understand its clients operations and to work in concert with its workers compensation underwriters, agents, and/or risk management consultants to determine proper classification. Inaccurate classification can lead to undue credit risk for the staffing company, underestimation of the severity of exposures, under-pricing of a staffing company s product and, finally, can adversely impact experience modification ratings when losses develop in line with the true underlying exposure. The importance of accurate classification for staffing companies becomes more focused in states such as Pennsylvania and Delaware, where workers compensation rating bureaus have implemented specific corresponding class codes for temporary workers. Be sure to check with your underwriter and agent up front to understand this evolving trend. To exemplify the concept of classifying based on the business versus the individual placed workers, we ll share real world examples that will be useful to your firm in understanding the importance of the classification system. Example 1 Staffing Firm X has an opportunity to provide clerical support staff to a local school district. Workers will generally be fulfilling clerical/administrative functions. Intuitively, one would first envision the use of 8810, the clerical class code. However, upon closer analysis, we find that schools fall under the 8868 classification (NCCI, et. al.) and clerical functions are not broken out separately. Therefore all workers, except for non-professional staff and drivers, are classified in the governing code of 8868. Another scenario emerges in the medical services arena where a staffing firm provides workers to doctor s offices. These operations also fall within an all- encompassing governing code, in this case 8832 (NCCI, 8834 CA). So, if staffing firm X provides administrative support to the doctor s office, that individual would be classified under the governing code 8832, not the clerical code 8810. Example 2 Staffing Firm X is placing non-skilled workers at a plastics manufacturing facility. The placed workers will solely be involved in janitorial clean-up work. Plastics manufacturing falls under the governing code of 4484. Therefore, all workers placed in that facility who were not otherwise in a standard exception code noted above, shall be classified in the governing code of 4484. Code 9014, janitorial service for others, would typically capture janitorial work; however, the placed worker is working at and for a plastics manufacturing facility, not for a janitorial firm. Therefore, the 4484 code would apply in this case. Interestingly, had the staffing firm placed that same worker at ABC Janitorial, who was doing work at the plastics manufacturing firm, that person would have been classified 9014, since he/she was working for a janitorial firm, which falls under the governing code 9014, janitorial service for others. Whether collecting proper fees to cover the placed worker, preserving the integrity of the staffing firm s experience rating modification, or reducing volatility in the workers compensation audit, having a rich understanding of the client company s operations and properly classifying them is invaluable to a staffing company. Through years of working with staffing companies, it s become clear that staffing companies derive long-term benefit from having direct, constant dialogue with their insurance agent, and most importantly with their insurance carrier s underwriting and audit teams. 7
Consideration #4: Staffing Companies and Experience Rating Modification Factors Experience modification can have a major impact on a staffing firm s overall cost of workers compensation. Whether your firm is in an NCCI state or in a state with its own rating bureau, it s critical for staffing companies to have a baseline understanding of how the experience rating system works and how you can lower your cost of insurance. At the most fundamental level, the experience modification system is a merit-based rating methodology that incentivizes employers to minimize workplace injuries and that equitably distributes the cost of workers compensation among employers within particular industry classifications. The experience rating system is designed to: blend macro-historic loss data on a statewide basis for specific industries; project benefit levels that must be paid by an insurer for expected losses within that specific industry, and project the specific history of payroll and claims of a given individual company (typically known as experience the combination of claims and payroll at a class code level). Similar to the technical stock analysts beta tool which forecasts future volatility of a given stock relative to other stocks, experience modification in workers compensation compares the experience of a given company with all other companies in similar classifications and predicts future experience. This mathematical comparison results in the experience modification factor (commonly known as the emod ), and is expressed as a percentage or a decimal (with 1.00 known as unity ). This indicates the given company has claims experience on par with the given industry classification. If the experience rating is greater than 1.00, for example 1.10, the risk has a greater probability of underperforming (having higher claims than the industry at large) and would carry a correspondingly higher insurance charge (+10%) to reflect their experience. On the other hand, an experience rating less than 1.00, for example.90, indicates the risk has claims lower than the industry average (better than average performance) and is economically rewarded for their safety record (-10%). While the actual experience rating factor is based on payroll, workers compensation class codes and losses within those codes, qualifying risks for experience rating is based on the premium generated by a given company. Experience modification is mandatory in all states, and most staffing firms are subject to experience modification given the importance/magnitude of workers compensation to their livelihood. NCCI and state rating bureaus set minimum annual premium qualification thresholds for experience modification that typically are in the $5,000 range, and commonly comprise the previous three policy periods, excluding the most recent. Check with your insurance agent about exact qualifications for your staffing company. 8
Staffing Companies and Experience Rating Modification Factors continued Although beyond the scope of this guide, it is useful to understand the key elements of the experience rating formula. We encourage you to work with your insurance agent and/or visit resources such as www.ncci.com for further background on the experience rating formula. Following is a synopsis of the NCCI formula. It s important to understand that non-ncci states utilize their own formulas that are variations on this same theme: Primary Losses Stabilizing Value Ratable Excess Totals (1 minus Weighting Weighting Value Actual Primary Value) Ballast x + + + Losses x Value Actual Excess = Total A Expected Excess Losses Losses (1 minus Weighting Weighting Value Expected Value) Ballast x + + + Primary Losses x Value Expected Excess = Total B Expected Excess Losses Losses For the experience rating modification, divide Total A by Total B, then round to two decimal places. Your experience modification factor is calculated by the rating bureau on an annual basis and impacts your policy based on your Normal Anniversary Rating Date (commonly known as ARD ). These are the month and day emod changes that apply to your policy. ARDs can vary, but most often coincide with your policy inception date. There are circumstances that cause policies to cancel or extend, which can impact the ARD. Rating bureaus are systematic in their treatment of ARDs to eliminate the potential for insureds to unfairly take advantage of a lower experience modification and/or rates for a longer period of time. Insureds may attempt to do this by cancelling their policy mid-term and rewriting in hopes of carrying their ARD forward for an extended period. In the scenario described above, the lower emod and rates would apply only until the companies ARD, and from that point forward the new rates and appropriate emod would apply. 9
Staffing Companies and Experience Rating Modification Factors continued Two simple immediate steps a staffing company can take to positively impact its experience modification factor, and thereby lower its cost of coverage, include: 1. Because temporary services companies typically operate in multiple class codes, it s critical a staffing firm s risk management department has clear understanding of the specific risk characteristics at their client companies, and importantly has the ability to influence a safe environment. If a client company has a debit experience modification factor (> 1.00) and your company is placing workers in that environment, your workers will likely be at higher risk than at a company in the very same business with a credit e-mod (< 1.00). To be sure, this does not necessarily mean the prospective worksite is not safe, but it does signal to the staffing firm placing the worker that the history at that particular company has been worse than the average in that business. That can impact your experience over the longer run. 2. Claims drive experience modification factors, yet claims are a reality an employer must deal with on a proactive basis. Staffing companies that take a laissez faire approach to claims ( letting the insurance company handle them ) consistently have higher experience modification factors and are ultimately paying more for their workers compensation insurance, have lower gross margins, and are generally less competitive with other staffing firms. Conversely, those staffing firms that work collaboratively with their insurance agents, carrier s underwriting, claims and/or TPA and audit teams, can lower their overall cost of coverage. Below are inspirations for consideration: Have a detailed step-by-step disciplined system for handling/reporting every claim. Do not leave it to the site level employer to report your claim to your insurance company. Statistics strongly support that the timelier a claim is reported, the lower the cost of the claim. Conversely, if the lag time, or the number of days between the original date of injury and the date of filing the workers compensation claim exceeds 10 days, claims are more likely to be litigated. Only 22% of claims reported within the first 10 days are litigated compared to 47% when the claim is reported more than 31 days after the occurrence. Studies show that back injuries as a whole cost 35% more if not reported within the first week of occurrence! (Source: NCCI) Bottom line, a critical buying decision for your workers compensation is whether or not your prospective carrier and TPA can support you in mitigating lag time! As these simple examples illustrate, failure to report claims in a timely fashion can lead to profoundly higher costs of claims, higher e-mods and a materially higher cost of coverage. Indemnity or lost-time claims can have an adverse impact on your e-mod. Work with your carrier s TPA claims team to help implement a dynamic return-to-work program. Be sure your prospective carrier and/or TPA can share this kind of expertise with you. The faster you get employees back to work, the lower the indemnity portion of claim goes minimizing the impact on your e-mod. 10
Staffing Companies and Experience Rating Modification Factors continued Know in advance where you will send workers if they are injured on the job. Do not leave this to chance! A critical buying decision for you is whether or not your carrier and/or TPA: 1) has deep geographic Preferred Provider Networks to handle your claims, and 2) can offer you real-time, on-line access to those networks so the employee, site level employer and everyone at your staffing company knows exactly where to send that injured worker based on his/her injury. Leaving this to chance not only can delay coverage, but can also lead to treatment at higher-cost facilities. The adverse economic impact to staffing companies is substantial, yet tools are available to you that don t typically have incremental cost to you. Ask and learn! In conclusion, it s important to note the material impact an experience modification factor can have on a staffing company, both from a favorable and negative perspective. As we explore the subject further, it becomes crystal clear that a strategic risk management approach to claims can make or break a staffing company s experience modification factor. Over the past three years, Artex has observed many staffing companies jumping on the lowest cost of coverage, only to see their experience modification factors creep up as claims were not diligently handled. What was thought to be cheap comp actually is costing the company more economically and administratively. This is a theme that replays itself in times of economic uncertainty and depressed workers compensation rates, yet those staffing companies that strategically position themselves with carriers that bring a diverse set of risk management tools tend to mitigate the broader swings in e-mods and lower their overall cost of coverage over the long run. Our advice: E-mods matter, so ask the detailed questions about strategic risk and claims management! 11
Consideration #5: Three Simple Benefits of Working with Artex on Your Staffing Firm Workers Compensation 1. With a 15-year track record, Artex s provides our agent and staffing-firm insureds the stability, strength and commitment they demand. 2. We provide underwriting and program management services to staffing firms of all sizes, ranging from smaller regional staffing firms to among the nation s largest. Our staffing firm-centric, on-line client management platform allows: staffing firms to issue certificates of insurance without having to contact your insurance agent, speed of response for your customers and liberation for the insurance agent. 3. We know economics counts! Our surveys of long-term staffing firm clients and their insurance agents consistently show that the Artex program meets their needs from an economic viability standpoint, and continually exceeds both of their needs from a day-to-day servicing standpoint. 12
About Artex Risk Solutions Artex Risk Solutions delivers collaborative expertise to insurance agents and their clients from specialists who assess, formulate, and design highly-responsive insurance programs ranging from alternative risk (captive) structures for individual companies and groups, to specific industry guaranteed-cost programs. Staff Guard is a highly-responsive, guaranteed-cost workers compensation program that provides agents and staffing companies unparalleled responsiveness and turnkey solutions, including unbundled claims management through Gallagher Bassett and Artex s Analytics and Claims Advocacy services. Frequently Asked Questions Q: How long does it take to underwrite a typical staffing firm? A: With a complete submission, our systems allow us to move through the underwriting process in as little as one week for a typical middle market staffing firm. Most commonly, we recommend planning on approximately 30 days to go through the underwriting process. Q: What about financial statements what do you require? A: Since Artex seeks to partner with staffing firms that will be in the business a long time, we do require financial statements. Artex understands not all companies have audited statements, and many have an accounting firm review and compile their year-end statements. Reviewed and compiled statements will suffice. To the extent neither of the foregoing is available, Artex requests current year-to-date and preceding two year s end income statements, balance sheets and, if available, a statement of cash flows. Q: Is Artex competitively priced in the staffing firm market? A: Artex has successfully underwritten staffing firm for nearly 15 years. We understand the importance of economically viable insurance programs for our staffing firm customers, and our longevity in the market suggests we are providing competitively priced coverage along with a highly responsive on-line service platform. Q: What if my staffing firm has class codes that are on your excluded list? Does that mean we cannot do business together? A: Artex takes a thorough look at each staffing firm to understand not only their risk management capabilities, but also what their client companies operations and employee placements comprise. In certain cases, we make exceptions for best-in-class risks. 13
Contact Artex Risk Solutions: The Staffing Firm Specialists There is much for a staffing firm and its insurance agent to consider when placing its workers compensation coverage. We hope this buyer s guide has provided you with useful insights and information that will help you in this ever-critical element of a staffing firm s livelihood. We invite you to call Artex today to speak with a member of our staffing firm experts team. We appreciate the opportunity to work with you. Call today! Contact: Andy Atsaves 800.411.3678 or 480-951.4177, Ext. 223 Monday Friday 8 a.m. to 5:00 p.m. MST Other contact information. artexstaffguard.com Artex Cedar Hill main Office 8800 East Chapparral Drive Suite 230 Scottsdale, AZ 85250 (480) 951-4177 A1-19635-A (02/11) 11-0301 2011 Artex Risk Solutions. All rights reserved. Insurance coverages are underwritten by individual member companies of Zurich in North America, including Zurich American Insurance Company. Certain coverages are not available in all states. Some coverages may be written on a nonadmitted basis through licensed surplus lines brokers. 14