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Workers Compensation Insurance Premium Disputes

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Reducing Premiums through Employee Leasing

How can an employee leasing firm potentially reduce an employer’s workers compensation costs? These are the principal mechanisms.

Premium Discount

Leasing firms potentially provide reduced workers compensation rates through an in- surer’s “premium discount.” [See “Premium Discount”] Premium discount has a specific meaning in workers compensation rating; it refers to a rate reduction based solely on the size of the premium and reflects an insurer’s decreased expenses, as a percentage of premium, as the premium size increases. 

For example, it does not cost an insurer 10 times as much to issue a policy with a $500,000 premium as it does to issue a $50,000 premium policy, all other things being equal. As policyholders, employee leasing firms are inherently large accounts because they aggregate the payroll of their clients for workers compensation purchasing. Simply put, leasing firms’ size provides their clients volume workers compensation rate discounts.

Actually, the issue is a more complicated than this, especially as of July 1, 2005. As explained below, before that date, experience-rated clients of employee leasing firms were required to be insured under separate policies [see “Rule Four”]. Thus, in theory, and assuming the same insurer (i.e., same filed premium discount percentages), an experience-rated client could derive no premium discount advantage by using an employee leasing firm unless the insurer’s rate filing [see “Insurer Rate Filings”] so provided. As of July 1, 2005, separate policies are required under all leasing arrangements, whether or not the client leases a majority of employees or is experience rated. Whether the insurer can aggregate a leasing firm’s separate client policies for premium discount purposes should depend on the insurer’s rate filing.
 
Rate Reduction

Leasing firms may obtain reduced workers compensation rates through an insurer’s other rate discounts. Since insurers may afford different policyholders greater or lesser schedule credits/debits (i.e., rate deviations from the insurer’s modification of Workers’ Compensation Insurance Rating Bureau (WCIRB) pure premium rates) [see “Schedule Rating”], an employer may benefit from lower rates by purchasing insurance through (as part of) a leasing firm.

The “in theory” caveat reflects the fact that insurers are limited to the schedule credits/ debits stated in their rating plans filed with the insurance commissioner. Typically, those plans state that a certain percentage deviation will be made for such things as the policy- holder’s financial condition, years of management experience, and safety equipment. The insurer is obliged to document its proper application of its filed rating plans and to maintain appropriate records. Thus, it is unlikely that an insurer may legally grant additional rate credits to an employee leasing firm (or that firm’s clients) simply because of the purchasing arrangement as opposed to individual risk characteristics.

In the author’s experience, however, the market reality is often that rates (or credits) are negotiated up-front, with a paper trail for the regulators created thereafter (if at all) to support the credits granted. [See “Underwriting Considerations.”]

More Sophisticated Premium Management

An employee leasing firm should have greater expertise in classification, payroll, experience modification, and related rules than most individual employers. This may inure to the client-employer’s benefit, as the employee leasing firm identifies and implements (or pursues with the WCIRB) challenges to existing arrangements on the employer’s behalf.

This is also an “in theory” benefit. While this may indeed occur with knowledgeable and reputable firms, regrettably, the opposite is common. Due to the pressure to offer lower workers compensation rates in the extremely competitive leasing industry—and, in recent years, in the increasingly competitive workers compensation market generally— some leasing firms misclassify (through intent or neglect) and/or misallocate payroll. Insurers have found it difficult and expensive to audit these practices due to:

1. the number and size of the leasing firm’s clients, and

2. the insurer’s lack of a direct working relationship with those clients if the in- surer chooses to issue policies with the client as the named insured, an option permitted under the July 1, 2005, rule changes).
 
Even assuming the leasing firm’s honest intent and effort, it is difficult for that firm to audit the data provided by its clients. For this reason, as discussed more fully in the February 2005 newsletter, some leasing firms supported the proposed elimination of “master policies” allowing them to aggregate their non-experience-rated clients because the audit burden would necessarily shift to the insurer.



Published: Sunday, February 26, 2012
Last updated: Sunday, February 26, 2012
By: Arthur J. Levine, Ph.D.

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