On this episode of the WorkSAFE Podcast, Becky Duello, Senior Underwriter at MEM, discusses how the frequency and severity of a claim impact a company in the present and future.
In the world of workers compensation, loss runs affect a business’s risk evaluation. Underwriters look carefully at a company’s claim history. This process gives them an understanding of how frequently claims are happening, how severe they are, and if a business is putting effort into reducing workplace risk.
Whether a company has had several small claims or one large, severe one, the impact of a workplace incident matters.
Listen to this episode of the WorkSAFE Podcast, or read the show notes below.
The importance of loss runs
Underwriters who specialize in work comp evaluate the risk a company presents before a policy is written. Part of that process is looking at loss runs. A loss run shows a record of past claims, including dates, descriptions of workplace incidents, and amounts paid.
“We evaluate loss history, or loss runs, when a submission comes to us for the first time to be quoted,” Duello explained. “That’s the first time we’re looking at them.” Underwriters will look at the prior year’s loss runs. Typically, they like to review at least four years of records, but will look further back when needed. This information tells the story of risk and incidents in a workplace.
Frequency vs. severity
Underwriters look for trends in losses. Two patterns stand out in particular in a loss run: frequency and severity. Frequency refers to how often claims occur, while severity encompasses how financially costly a claim is. Duello highlights that severity depends on several factors, including:
- Business type. What industry is the business a part of, and what is the risk level involved in the work?
- Injury severity. For example, does the claim involve amputation, severe burns, or acute spine or neck injuries?
- History. Has the business experienced a claim like this before? Were any steps taken to prevent it? Are the same employees getting hurt?
Duello points out that the answers to these questions don’t necessarily rule out employers from obtaining a policy. “Are they gonna continue having these kinds of losses?” She questions. “And if they are, it’s not a deal breaker for us. The question then is, are we able to price adequately for the expected losses?”
What if a business doesn’t have any loss history?
If a business has never had work comp before, workplace incidents will not have been formally recorded. In these situations, underwriters will look at any work-related losses or expenses.
Brand new businesses won’t have any loss history to review. Consequently, they present their own unique risk. “A new venture is considered a higher hazard type of risk because new businesses don’t always get off the ground,” Duello shared. “They don’t last very long sometimes.”
Frequency vs. severity: What stands out most to an underwriter?
Many employers think that having a large, severe claim is more damaging to their loss history than smaller incidents. But Duello finds that the opposite is true. Underwriters consider several elements, including a business’s longevity, previous losses, pay history, audit compliance, and whether or not a safety program is in place. Each one influences both pricing and renewal decisions. There are important warning signs they look out for.
“A lot of small claims stand out more because any one of those small claims can become a large claim for various reasons,” she shared. “Actually, a motto that’s known throughout the insurance industry is ‘frequency leads to severity’.”
“We’d look to see if frequency, severity, or both have been trending up over the last several years,” Duello added. “That’s a red flag to us as an underwriter. We’ll also look at the types of losses to see what the loss drivers are, meaning which types of losses are occurring more frequently.”
The significance of repeat-injured workers
An important consideration for underwriters like Duello is repeat-injured workers. These employees have been injured on the job multiple times over a span of months or years. It may indicate ongoing issues with that employee. For example, they haven’t been properly trained, ignore safety rules or procedures, or have lasting issues as a result of a previous injury.
A repeat-injured worker has an impact on a business. Underwriters know they present a continued injury risk. “As long as that person is still employed with them, that’s going to continue,” Duello pointed out. “We need to price adequately for that.” For an existing policyholder, this can also play a role in declining to renew a work comp policy.
The role of safety culture in managing claims
Underwriters expect a frequency of claims in some industries and operations. In these cases, the essential task is controlling severity. Where low frequency might be the norm in another business, an increase in claims is a concern. In both situations, underwriters are looking closely for commitment to safety, or a lack thereof.
Management may not enforce current safety policies. Employees may not buy into a safety program that’s in place. “That to us means that losses will continue as they’ve been, and so we need to price for that,” Duello said. But underwriters also seek different solutions where possible.
“It also means we may need to get Safety and Risk Services in touch with them to discuss those options that are available to them to try to bolster their safety program or get their employees to actually buy into what they’re trying to do with safety.”
Solutions of all sizes
Safety professionals at MEM offer solutions of all sizes. Every business has its own needs, may have experienced certain workplace incidents, and will want a solution that works for them and their employees. Underwriters are uniquely positioned to look at loss history, what potential struggles a policyholder may have, and connect them with the right resources. And while many carriers limit personalized services to larger account holders, MEM policyholders can tap into these resources, no matter their size.
Underwriters also rely on safety professionals to serve as their eyes and ears in a business. JA submission and loss history review don’t always tell a full story. A company that appears to be struggling on paper may also be putting all its effort into safety improvements in the workplace. Safety professionals can highlight where employers are doing things right or investing time and effort in getting there.
Agents and underwriters: Partners in reducing frequency and severity
Insurance agents serve as crucial partners for underwriters. During the submission period, the majority of communication flows between them. “They’re ones that provide us with the information we need to price and price not just adequately, but price fairly and all those good things,” Duello said. “And then, you know, we rely upon them to get the information out to the insured.”
In practice, Duello might enlist the help of an agent if a policyholder is putting off complying with safety recommendations. Safety professionals make detailed safety recommendations to address problems that may cause an injury in the immediate future.
“Agents understand the importance of safety just as much as we do,” Duello shared. “And we work together to try to help each other get the policyholder in a good place with safety so that their people are coming home every night.”
How to reduce frequency and severity today
For Duello, employers can reduce claim frequency and severity by starting with a simple step: creating safety rules. Organizational leaders are responsible for leading by example and following safety rules, too. They won’t mean anything to employees if leaders don’t follow them, too.
“I would tell them to implement a set of written safety rules that are specific to their operation,” she explained. That doesn’t mean creating a 500-page document filled with guidance that isn’t relevant to the workplace. “Just a very basic set of written safety rules specific to your operation. Share them with your employees. Have them sign off on those rules. And then enforce them.”