Improving Policies

Profitability

As the manufacturing environment evolves, executives must evaluate and consider all costs, including workers' compensation insurance.

By John Rosmalen

For the last 11 years, manufacturing in the United States has been slowly moving toward a path to recovery. Based on U.S. Bureau of Labor Statistics, it can be viewed as a rebirth, albeit a gradual one. As the restoration of American manufacturing brings more jobs to the labor force, manufacturers will face a plethora of financial considerations to address including various laws and regulations, none the least of which is workers’ compensation insurance.

To understand the current milieu, here is a brief historical perspective on the evolving manufacturing environment and the challenges that will come with it. In the first decade of this century, American businesses were establishing partnerships with China to bring goods to the United States. Production costs were significantly below manufacturing expenses in the United States and chief financial officers focused more on risk management since there was no reason to be concerned about workers’ compensation costs and compliance. Then came the global financial crisis, which brought all of these problems to the forefront—poor product quality, safety issues, copyright and information theft.

 

Add inferior steel quality, poor industry practices and intellectual property theft, and it is easy to explain why manufacturers are interested in returning to America. As they re-shore, companies have reinvested in technology to expedite and improve production—the best way to compete against their overseas counterparts’ penchant for cheaper-quality goods and some questionable business practices.

The impact of the economy on insurance rates

So what does this have to do with workers compensation insurance? Plenty. The insurance industry in general and workers’ compensation in particular, had been left with gaping holes when the emphasis was on outsourced overseas manufacturing. U.S. manufacturing programs went by the wayside, forcing underwriting firms to reduce staff.  First to go: the most experienced and higher paid personnel—a virtual brain drain in the underwriting industry. Few underwriters remained who had the expertise to develop workers compensation premiums for electroplating, millwright works, engineering in particular and manufacturing in general. 

Manufacturers who came back along with those who stayed are facing higher premiums for workers’ compensation insurance. In many cases, they shouldn’t be. Here is an illustration of a system gone awry. Consider industries that use toxic chemicals. Adherence to safety protocols will render those chemicals safe and non-threatening to the general workplace environment. Yet these manufacturers have nonetheless been hit with unusually high rates. Even industries with a long record of safety and minimal OSHA violations are feeling the costs impact their profit margin at an unacceptable level. The higher prices have little or nothing to do with their company’s safety record and everything to do with the carrier, specifically underwriter unfamiliarity with the industry and its risk assessment.  

Here is a common example. Ask a workers’ comp underwriter what a CNC machine or a lathe is, and you’re likely to find few if any who understand the workings of complex machinery and their potential benefits or pitfalls. Lack of knowledge is likely to result in one or two scenarios, both of which are detriments to sustaining manufacturing growth. Either underwriters will decline to produce a policy or if they do, the costs may be prohibitive. 

The other major obstacle for underwriting policies has been the growth of state compensation funds. These were originally designed as the market of last resort for companies unable to attain this essential insurance. Instead, more companies turned to them instead of private underwriters, which forced a number of insurance companies out of the market and placed an even greater burden on state funds. The experience of California is somewhat typical. The resulting situation increased premiums on average of 12-25 percent from 2012-2016 in the state according to the Department of Commerce. However, 2017 may finally break the trend of increasing rates. Underwriters are forecasting a rate reduction of as much as 5.3 percent in the Golden State, while a number of insurance companies are starting to relax their underwriting guidelines.

Avoid high insurance rates

So what can manufacturers do to help ensure the most reasonable rate for workers’ compensation insurance? Begin by providing data and all relevant information to underwriters, especially those unfamiliar with this discipline, about what is being done to alleviate risk. Verifiable data and well thought out occupational safety programs are a must. So are background checks on all employees, best practices for HR techniques and fully documented operations manuals. If the data generated by these policies verifies positive, successful results from safety directors, regular meetings on safety (these should be weekly) and a consistent attitude of willingness to reduce risk within the workplace, the documentation may significantly reduce workers’ compensation expenditures. 

When it comes to verifiable data, it is important to simplify industry statistics and explain the process in order to get comprehensive and fairly generated prices. That’s because the manufacturing sector has varied circumstances requiring different policies than those written for restaurants, hotels and other retail businesses. It’s an important point to make because lesser-experienced underwriters’ background may have been in the hospitality or related industries, so material that enlightens underwriters should be considered a valuable investment.

A software program that can provide such data is a valuable tool when it comes to purchasing a comprehensive policy at less cost—a justifiable concern for every CFO. Speak to agents about occupational health and safety programs offered by their insurance company. A number of major players offer these programs free of charge for those who have coverage. Experienced underwriters will tell you that safety programs make up nearly 80 percent of all available credits on every policy controlled by an underwriter.

Manufacturers that follow these steps will get less expensive and better workers’ compensation policies.

John Rosmalen, a veteran of 25 years in the financial services industry and a qualified CPA, is senior underwriter and program manager for Imaco Insurance, which offers underwriting solutions, cost efficient access to worker compensation programs and expertise to help client companies thrive. Tel: (800) 943-3821 or visit our website: www.imacoinsurance.com.

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