Workers compensation experience rating, safety

The actuarial premises on which the workers compensation experience rating system was developed give credibility to OSHA incident recordable and lost workday case rates as measures, and predictors, of safety performance, with these qualifications The statistical base (the hours worked) on which the records are developed has to be large enough and low probability-severe outcome risks may not be encompassed within the experience base. 

Safety professionals should also be aware of the reality—managements usually set goals for improvement based on previous results. Historical measures to be discussed here—so-called lagging indicators—are OSHA rates, workers compensation costs, workers compensation experience rating, and control charts. 

Experience rating is mandatory for all employers who buy workers compensation insurance from insurance companies. For those employers, experience rating is one of the historical performance measures that can be used, cautiously, as an indicator of the quality of safety in place. Self-insured companies would not have workers compensation experience modifications. 

Prequalification and selection can range from a simple review of performance data to a comprehensive review of both performance and safety programs. The simplest approach is to request the company s workers compensation Experience Modification Rating (EMR) issued by the company s insurer for the last 3 to 5 years. An EMR of 1.0 is the average for the industry 0.5 is half the industry average, and 2.0 is twice the industry average. More extensive safety information submittals may include any of the examples outlined in Table 5-1. 

Do the OSHA statistics—the recordable case rate and the lost workday case rate —for an exposure of 1,000,000 hours have a confidence level of, say, 68.27%, as measures of the quality of safety performance An entity of this size would more than likely purchase workers compensation insurance and have an experience modification as an additional measure. 

To investigate the impact of workers compensation insurance we used a method identical to that described for investigating the impact of OSHA enforcement activities. Specifically, we first numerically simulated hedonic labor market equilibrium at four rates of income replacement (0.5, 0.8, 1.0, and 1.5) assuming no experience rating of WC premiums and no safety and health standards and then calculated changes caused by increasing WC benefits from the usual 0.50 rate of income replacement. To examine the interaction between OSHA and WC we varied the average fine for safety and health violations from 0... 

The National Commission on State Workmen s Compensation Laws recommended insurance providers experience rate WC premiums to the maximum extent feasible. Historically, WC insurers have not used the accident experience of a small establishment to determine the establishment s price of WC insurance. Instead, they have combined the injury statistics for all workers within an industrial class and determined a so-called manual rate for WC coverage. The product of each worker s wage rate and the manual rate for his or her industrial class summed over all workers determines the total WC insurance premium for a small firm. As firm size increases insurers pay less attention to the average experience of the industrial class (the manual rate) and more attention to the safety record of the individual firm. Experience rating of insurance policies refers to the process of adjusting insurance prices... 

The major finding to emerge from our simulations in Chapter 4 is that the degree of experience rating of workers compensation premiums influences both the direction of the effect of WC benefits on workplace safety and the interface between the OSHA and WC programs. If insurance providers were to experience rate WC premiums perfectly then WC would dramatically reduce workplace injuries, and OSHA and WC would strongly complement each other in enhancing workplace safety. 

Our numerical simulations and the econometric research we reviewed also make us conclude that workers compensation insurance encourages workplace safety. Because increased workplace injuries raise a firm s insurance premiums workers compensation acts as a tax on injuries. As with any tax employers can limit payments by reducing the activity taxed. If the cost of purchasing WC falls more than the cost of new safety equipment or safety education programs then the firm will pay more attention to workplace safety. WTien strongly experience rated workers compensation insurance leads firms to the cost-benefit calculations necessary for cost effective safety expenditures. 

OSHA uses injury and illness rates to assess effectiveness of occupational safety and health efforts. Insurance companies use an experience model to determine good and poor risks for underwriting workers compensation coverage. Accident and injury experience does provide a good indicator about the effectiveness of hazard control initiatives. However, accident frequency and severity rates alone do not always accurately evaluate effectiveness of an accident prevention function. For example, an organization may experience an underreporting of occupational disease cases and hazardous materials exposures (Table 1.21). 

Each workers compensation claim is either directly or indirectly a drain on the profit margin of the company. This is the primary business reason to track workers compensation claims. Many employers who have a less than stellar experience modification rate (EMR) may have difficulty in procuring work, or bidding on work, when perspective buyers assess their safety and health performance. 

Workers compensation insurance is not in its simplest form a preventive measure it is merely a way of distributing the costs of injury across all employers. It can be made to serve a preventive function if the insurance premiums paid by employers are stmctured to reflect the accident experience of the particular employer. If companies with high accident rates have to pay correspondingly high premiums this should, in theory, give employers a vested interest in the health and safety of their workers, assuming a carefully designed scheme. 

Implementing an effective safety program to reduce work site incidents can influence workers compensation premium costs. Lowering the frequency and severity of construction accidents will help to lower experience modification rates (EMR) and manual rates that, in turn, lower workers compensation insurance premiums [3,7]. 

An example would be the shutdown of an operation that resulted in a rash of workers compensation claims. Nevertheless, with caution, an experience rating modification can be used as one indicator of the quality of safety in place, and as a predictor of the future—along with other measures. 

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