“Other states have made attempts at this and failed, but I’d make a strong argument that California manages their workers’ comp risk far better than any state in the country.”
That surprising statement came from John Unick, president of the Thoroughbred Racing Division at MOC Insurance Services a San Francisco-based broker and managing general agency. He was talking about the Finish Line Self Insurance Group that was established 8 years ago to provide affordable coverage to the horse racing industry in California.
A quick search of the WorkCompCentral archives will reveal that the horse racing industry was really hit hard on workers' compensation rates about 10 years ago, with some trainers paying upwards of $40 to $50 per $100 of payroll for coverage. The crisis threatened to shut down horse racing in California.
Finish Line now covers 98% of all thoroughbred trainers in the state and generates about $16.5 million in "premium" to fund the program every year.
The managers of the group took a creative, and unusual, way of calculating premiums for members.
The groups 450 members pay based on the number of horses as opposed to employees – in other words, a trainer with 50 horses is going to pay 10 times more for workers’ comp coverage as a trainer with five horses. This formula was devised to get around the issue of trainers routinely underreporting payroll.
Because underreporting payroll was so rampant in the industry, and the injury rate remained high (this is, after all, a sport) traditional carriers just assessed higher rates per payroll ever year, until it reached the critical stage threatening the industry's survival. And trainers would underreport payroll even more, creating a vicious cycle.
Under the Finish Line program, because rates are based on each horse, they are easily quantified and there is no gaming on payroll. In fact, the occupation with the highest injury rate in the industry - exercise trainers - were not counted on a trainer's payroll in the past. Trainers would consider them independent contractors even though under California law they are to be considered employees, along with jockeys.
Now, exercise trainers are covered for work comp because their payroll is not a factor.
Finish Line’s members pay $2.95 a day per horse. This makes calculating premiums a snap because the number of horses trainers have at each racetrack is easily traceable with stable superintendents.
Another important factor that has been critical to Finish Line’s success has been how it calculates its experience modification rate or mod rate. The program does not base its performance on individual members’ mod rate, but rather on the group’s performance.
If a jockey is injured in a race as a result of another horse’s actions, but the jockey on the horse at fault did not get injured, the mod rate for the trainer whose jockey was injured would go up, even though he or she did everything right. Calculating the mod rate as a group is one way to make everyone responsible for each other’s actions.
This is the kind of creativity with the right incentives constructed that can make workers' compensation a shared burden without the volatility of radical reforms bent on changing claim behavior. All claims originate from employment - how the employment relationship is managed can have a dramatic impact on how the overall system performs.
And at the same time encourage safe practices as well as discourage fraudulent behavior.
Obviously this method of "insurance" is not transferable to other industries. The point I'm making is that non-traditional techniques can be successfully deployed to manage risks if one is willing to explore alternative options with an open mind and a little creativity.