Adverse Pricing Changes

A couple times a month our policyholders call me and ask me about adverse pricing. Their question is, “How did it happen to me, and what are the causes”? While this is not a frequent question, I have to say it is one where the customer is the most concerned and anxious for answers.

My answer to this question first starts with a review of company payroll/growth. Sometimes it is a simple review – the payroll for your company has gone up by 50%. There is no rate increase; your premium increased because your company and its payroll is growing. If there is no increase in payroll or the increase is minor, then we move to the two primary causes of adverse pricing/rate changes. Within these two causes, there can be an impact at your next policy renewal as well as an impact a year or two later.

The number one cause of adverse pricing deals with an insured’s own loss experience. When a loss occurs at your facility, it becomes part of your experience modification calculation. It takes one to two years for a loss to be applied to your account. Let’s say, as an example, you have a loss and your policy period is 1/1 to 12/31. If the loss occurs in January 2014, it does not impact your experience modification until January 1, 2016 or one year after your current policy expires. This can cause heartburn for our policyholders. They have a loss and a long time passes before they get a surprise increase in their experience modification. The experience modification as stated in earlier articles is a calculation based on how your experience compares to the expected losses within your industry class.

The bad news of an experience modification calculation is that the loss stays on your experience calculation for three years. So it’s a penalty that happens not only the first year when you are surprised, but remains for a second and third year.

An additional impact of having losses is that it is part of your individual underwriter’s calculation. You earn credit for good loss experience, not only on your experience modification, but by your underwriter’s review. Adverse losses can impact your next policy renewal when the underwriter evaluates what your loss potential is and what kind of credit you would be entitled to.

A second premium impact is loss control inspections. Insurance companies evaluate policyholder safety programs, equipment guarding, employee education and testing as part of the account evaluation. There are credits given for safety programs and debits for a lack of these. When the loss control representative comes to your company and does an evaluation, they are not only there to help you, but their report is used by the company underwriter to determine what credits might be available. This is separate from the loss experience evaluation of your company.

So when a customer asks me what can they do to lower their premium in both short term and long term, do all you can to control your losses. An above-average loss account pays more than an account that has a good loss history. Underwriters do expect to have a loss. It’s no different than auto insurance where occasionally an auto accident occurs. However, if the account has several losses, then there is a more in-depth review and analysis about the account safety situation. Of course, this varies with size. An underwriter would expect fewer losses with a small account than if there are hundreds of employees, but the ratio or incident rate is easily calculated and weighed in the underwriting evaluation.

The short answer – reducing a company’s losses is good for our insured and its workers. The insured benefits short term with improved underwriting credits and long term with your experience modification calculations. As always, if you have any questions, all of us at MTMIC are available to help. Reducing your losses is good for you, your employees and MTMIC.