Workers Compensation Total Cost of Risk

The term “iceberg effect” in the insurance world refers to hidden claims dollars. When considering the cost of a workers’ compensation claim, what usually first comes to mind is the initial cost of the claim. However, what most may not know is that when a claim is incurred, it affects several factors that all equate to dollars and impact the employer’s bottom line. These are referred to as indirect claims costs. OSHA has spent considerable time and resources in researching what these dollars actually are. According to the study, the smaller the claim, the higher the percentages of the indirect costs associated with that claim. This makes sense as there is a common cost in setting up a claim, doing associated paperwork, etc. for all claims and this would certainly cost more as a percentage for smaller claims.

According to the study, for claims under $3000, the indirect costs are 4.5 times the amount of the claim, they are 1.6 times the amount of the claim for claims between $3,000 to $5000, and 1.2 times the amount of the claim for claims between $5000 and $10,000; finally for claims about $10,000, they are 1.1 times the amount of the claim. Even though it is fairly easy to spreadsheet these numbers, there is a worksheet on OSHA.com that does the work for you. It even goes a step further to show you what sales are needed to cover your claims. When our agency has completed these in the past for clients, they are very surprised when you show them the numbers, but the amount of sales to cover the claim is where it really hits home. Here is an example using a small to medium sized company with a workers’ comp premium of $80,000. If they had two $20,000 losses that year, it would cost them $21,000 in additional premium over the next 3 years and $44,000 in indirect costs which would total over $65,000 in total costs. When calculated like this, it is really just like you are self-insuring because the amount the claim ends up costing your company exceeds the initial claim amount. In the above example, the original claim was $40,000 yet it cost the company over $65,000. If you operate on a 3% margin, which is standard for manufacturing companies, this would take over $14,000,000 in sales to replace these 2 losses in that same 3 year period. Keep in mind, most of these costs are incurred in the first year.

What makes up these soft costs or indirect costs? Loss of use, loss of productivity, lost customers, damage to brand, lost contracts, investigation expenses, administration, bad morale among employees, time to attend hearings, etc. The list goes on and on. I would challenge those of you who have changed your culture to a safer workplace to look at your financial statements and give the credit for the improvements to the reduction of these direct and indirect costs. For those who may struggle to get upper management to look at something besides sales, use the worksheet to show them the importance of safety and loss prevention.

By Chris L. Moxley, CIC, CRIS

Professional Insurors Agency, LLC

Chris Moxley is the Vice-President of Operations for Professional Insurors and President of TCOR Services USA. He earned his Certified Insurance Counselor Designation in 1995 and his Construction Risk and Insurance Specialist designation in 2005. He is active in several industry associations and is a member of the Oklahoma State and Oklahoma City Chambers of Commerce and serves as President of the Arbor Lake HOA. With over 20 years’ experience in the industry, Chris serves as publisher for TCORBLOG.com and teaches classes in risk management and workers compensation.