Tuesday, May 12, 2015


These are radically different conferences because the audiences are different. Self insureds might be interested in the data that NCCI will present, but the focus of NCCI is insurance company operational profit (or loss); not of much concern to self-insured employers who are more concerned with financing their own claims operations.

Though different, both have to do with workers' compensation, and both will emphasize the cost of delivering benefits.

And both deal with what I think is a popular misconception: that employers' work comp premiums (or other related expenses) come directly out of the bottom line and profits.

That's not accurate.

The obligation of taking care of the working force is just one element of many costs that go into production of goods or services.

When I went to business school, the economists called this COGSS - ‘Cost of Goods or Services Sold’. Every company deals with the COGSS of their particular goods or services. They mark them up based on two constraints – the profit they want to make and what the market will bear.

Sometimes those two constraints have no relation to each other.

In the economic world, ‘the Market’ is the most brutal. It is the most relentless task master of all. For every business, the rules are the same. You either figure out how to produce a product or service that customers will buy and for which will pay a reasonable price, or you go out of business.

Regardless of the size of the business, be it Russell's Donut Shop in Ventura, CA, or WalMart International, all have the same task and the same challenge – make a profit or go out of business.

We know that, on average, workers' compensation coverage costs (insurance or self-insured) are less than 3% of Payroll. Payroll (on average) is less than 50% of COGSS. Raw materials and overhead expenses are the major costs. So, the burden work comp places on COGSS is 1 ½ percent or less.

So, the worst that can happen in work comp is it is a slight bump in the road in the overall analysis of COGSS.

Get into big business, and the numbers seem very large indeed, but that has to be taken into context. It's all relative.

And while business pays for  work comp premiums, the fact is that this cost is passed along to the consumer, to the extent that the Market will bear. 

The cost of providing work injury protection is wrapped up into the COGSS and then passed on to the consumer. 

In other words, business simply fronts the cost of workers' compensation.

No business that I know has ever gone out of business solely because of paying for work comp insurance. The premiums, the rates, or any other measure of the cost of workers' compensation are exactly the same for all the competition; the difference is management, and show me a company with excessively high workers' compensation costs and I'll show you a company that has dismal profitability due to poor overall management. 

Somehow competitors deal with the premiums and still manage to make a profit. A business that has excessively high work comp premiums is a business that has excessively poor management skills.

Workers' compensation was designed to spread the risk. The risk of having people hurt and off work being non-productive is a social risk. The risk of a business shutting down due to a huge jury award against it is a social risk.

One is more personal because it could be you or me. The other is more global because it could affect a whole swath of workers and taxpayers if a whole lot of people are out of work, not paying taxes, etc.

Workers' compensation is, when viewed from this perspective, a broad based and indirect tax on consumers.

Exclusive Remedy and the whole work comp system came about, not to protect the injured worker, but to protect the employers. Historical records show that, before work comp, injured workers were successful in suing their employers only about 15% of the time. But, when the injured worker did prevail, the consequences were disastrous for the employer, and for all dependent on that employer.

So I'll go to SIIA's Executive Forum on workers' compensation and will experience talks on medical marijuana, big data, excess coverage, regulator issues and trends. And I'll go to NCCI to hear about carrier profitability, challenges to those profits, and of course Stephen Klingel's famed sole word descriptor.

It's all good workers' compensation wonky stuff and I love it.

But let's not get distracted. At the end of the day, what we really need to understand is that workers' compensation makes the best of a bad situation - without it people and businesses run big risks; with it those risks are absorbed by all of society.

It's not us, it's not them - it's WE.

In the end, Governments are formed to, ‘promote the General Welfare’ (Preamble to the Constitution). Any act must support the Public at large. Whether it is workers' compensation, or any flavor of the month alternative, the goal must be of a globally social nature.

Fail society and you have an untenable, unworkable situation.

1 comment:

  1. >>>At the end of the day, what we really need to understand is that workers' compensation makes the best of a bad situation - without it people and businesses run big risks; with it those risks are absorbed by all of society.<<<

    Really? For the 20% who are abused and maimed by the system? For the rest who are locked into a straitjacket and thrown into a padded cell called "workers' comp" that has rules and regulations so old, that no one knows who wrote them, or why they can't be changed to adapt to the modern world? Health care is globalizing, as is everything else, so why not work comp? Going to the same conferences year after year with the same data pointing to ever increasing average medical costs for lost-time claims that now are just under $30,000 is not making the best of a bad situation. Tell that to the thousands of injured workers, especially those in CA, that this is the best of a bad situation. We need to wake up...we aren't No. 1 anymore.