Paradox in Insurance Agent Compensation on Workers Compensation Insurance

Paradox in insurance agent compensation on Workers Compensation insurance: Agents make more as losses and premiums increase; no incentive to drive losses or premiums down

Would you be surprised to learn that there are many compensation remedies to drive down the cost of your workers’ compensation (WC) premium but few insurance agents ever employ them? One reason for this is an agent’s lack of training. Another reason comes from what I call the Paradox of Insurance Agent Compensation— a paradox that rewards agents for doing nothing to control your WC expenses and premium.

 How can that be? Simply stated: There is a factor called an Experience Modification Rating (EMR) that is found on all policies generating a premium in excess of $5,000 annually. The EMR is a credit or a debit against your premium, based on your loss history. So if your losses are less than what is expected within your industry, you would see a credit or reduction in your premium annually. Conversely, poor loss experience results in a debit or surcharge against your annual premium. These surcharges can be as low as 5% or as high as 100%+.

 So how does the Paradox of Insurance Agent Compensation actually occur? If you have a poor loss experience, resulting in a debit EMR, your premium goes up and so does your agent’s commission. Why, then, would your agent be motivated to help you prevent or manage your losses, especially when he or she is not trained to conduct an evaluation that would uncover the cause of a poor loss experience?

 There is hope! An approach known as the Workers’ Compensation Cost Management and Recovery (WCCMR) Process is available. It begins with an evaluation of the expense drivers of an insured’s WC premium, including a determination of whether the losses are being properly prevented and managed:

  • Is a client hiring the wrong people for the type of work that needs to be done?
  • Are new employees coming with pre-existing injuries?
  • Has anyone looked into the types and causes of claims or conducted an audit of the client’s operation?
  • Once injuries occur, are injured employees being seen by board-certified occupational health physicians?
  • Are nurse case managers being used to assist with early-return-to-work programs?
  • Does the client even have an early-return–to-work program?

 These questions just scratch the surface in terms of the many expense drivers that could exist for insureds.

 There are indeed firms performing the WCCMR Process. Instead of relying on rising premiums to increase their revenue per account, they are being compensated in many ways that do not create the Paradox of Insurance Agent Compensation, such as performance-based compensation. Under approaches like this, the greater the savings they can deliver to their clients, the greater their compensation.  This is what I call – Alignment of Incentives; the client’s desire to lower their workers compensation expense is in alignment with a compensation plan that incentivizes their insurance agent.