The cost of workers' compensation insurance is one of the fastest rising operating costs for automatic merchandisers today. Many operators have reported more than 100 percent increases in workers' comp premiums this year. Insurance industry experts note that underwriters are now, after 15 years,

These increases are not restricted to workers' comp insurance; costs for just about all types of insurance are rising. Workers' comp costs, however, are among the fastest rising insurance costs. It is also a cost that can be controlled by an aggressive risk management program.

The sudden jump in workers' comp premiums appears to have happened as a result of 9/11. However, the tragedy of 9/11 was only one of many factors that have been building for several years. The bigger reason is that for years, insurers have sold policies at a loss. They have charged less for coverage than the cost of losses and expenses.

The historic "combined ratio"--costs of losses and expenses divided by premiums--is what insurance companies use to measure results. In 2001, the combined ratio was 121 percent for workers' compensation, according to industry sources.

Highway deaths are rising

Of special note to the automatic merchandising industry is that one-quarter of the 5,915 on-the-job deaths in the U.S. in 2001 were caused by highway crashes, and they are on the rise.

The losses, medical costs, wage-replacement rates and investment income create an environment where it's difficult to know the net result.

Workers' comp programs vary from state to state, and state statutes and court decisions control many aspects of the workers' comp process. Whether it's the recent California legislation (AB 749), the new Rulebook and H.B.2600 in Texas, the explosive growth of the Joint Underwriting Authority in Florida, or the fear by workers' comp carriers of state action, or in some cases inaction, these issues stop carriers from providing this coverage.

There is a fundamental similarity in state workers' comp laws, but these laws Vary considerably and therefore these discussions wilt be somewhat general in nature. Workers' comp coverage is elective in Texas. New Jersey has options for employers to purchase employers' liability coverage.

The particulars of your state laws may be found on your state department of insurance website. All states require an employer to protect its employees. In addition to state laws, there are several federal laws.

Most have a dual focus

All 50 states and the District of Columbia have workers' comp laws with the same basic objective: To provide benefits to employees for work-related injuries, and to protect the employer from lawsuits or actions by injured employees.

Workers' comp does not exclude any type of treatment or service, and if work related, provides to an injured employee the cost of medical care, rehabilitation, lost wages and death benefits.

The purpose of the workers' comp system is to return the injured worker, if possible, to the pre-injury condition and/or compensate the employee for any permanent disability.

Benefits include: medical benefits, temporary disability benefits, permanent disability benefits, rehabilitation benefits, and death benefits.

The dollar amounts of these benefits, as well as the related rules, vary significantly by state.

The 9/11 tragedy is estimated to account for only 5 percent or $2 billion of the estimated loss the insurance industry suffered in 2001.

The storm of convergence of the underwriting concerns of terrorism, the drop in investment income, repeated medical cost increases, rising attorney involvement in a "no-fault" system, poor stock market earnings, low interest rates and 15 years of a "soft" market have all created decreasing options and increasing costs that will be around for awhile.

Cost components: a brief overview

There are many cost components of workers' compensation, both direct and indirect They include rates, premiums, expense modifications, corporate culture, and programs such as accountability, training, hiring and return-to-work programs.

The best control begins with risk management. The management of risk must receive the same priority as the management of the business. Gone are the days of treating insurance as a commodity and delegated as an add-on to an employee's other responsibilities.

Costs of non-compliance

All employers are required to protect their employees from work-related injuries. If the employer does not have coverage and an employee is injured, there are significant consequences that vary by state but would or could include: significant fines, imprisonment, cease work order, employee lawsuits, higher employee benefit costs and personal liability fines.

Rating organizations

Most worker comp policies are written on a policy form that was developed by the National Council on Compensation Insurance (NCCI). NCCI has varying responsibilities, but is primarily a statistical organization that is the designated statistical agent in 33 states. The rest of the states have their own "bureaus" or independent rating organizations.

There are five states that have "monopolistic state funds" that provide all workers' comp insurance in those states. Employers in these states--North Dakota, Ohio, Washington, West Virginia and Wyoming--cannot purchase workers' comp from a private insurer. The remaining 10 states have their own state workers' comp bureaus that serve as statistical reporting agencies for those states.

Dofinitions for vending and OCS

According to National Scopes[TM] Manual published by the NCCI, Code 5192 applies to those insureds engaged in the business of placing coin-operated machines in locations owned or occupied by others.

Code 5192 also applies to operations of office coffee service companies or divisions engaged in the installation, service or repair of coffeemakers and similar equipment and includes the sale and delivery of products such as coffee, tea, hot chocolate mixes and dehydrated soups which are used in these machines.

Insurance companies base their premiums on many factors not entirely related to the past actions of the industry or the individual customer. However, these histories do figure into the formulas that companies use to determine individual premiums.

The example in the box above illustrates a formula for a hypothetical premium. It includes "Experience Modification" and "Scheduled Debits and Credits." These are factors that a business owner can influence by managing risks.

What you can do to manage costs

So, how can you manage to keep your workers' compensation costs in line? First, remember your primary asset is your employees, and their safety should be one of your biggest concerns. Their safety will not only benefit them, it will also benefit your productivity, as well as your operating expenses.

Managing workers' comp costs begins with establishing and creating a safe work environment and a corporate culture in which injuries are unacceptable. Every employee must be safety conscious. This also means having effective, safe operating procedures for all operations that are a part of the employee job descriptions.

The company must have effective, formal incident reporting procedures. These procedures would require management to keep a record of incidents and the corrective actions taken. These reports should be followed up with all necessary actions. For instance, if an employee is sent to the hospital, management should follow up with the hospital on the employee's condition, and keep a record of this report.

Incentives should promote safety

Risk management should be part of the company's operating procedures. The. company should have incentive programs to encourage safe operations.

Employees will be exposed to back, neck and shoulder injuries from lifting and moving heavy inventory or machinery. Since it is common for employees to handle heavy materials, hazards will include: slips, trips and falls; injuries from power tools used for repairs; back injuries and strains from moving large machines; the possibility of awkward twisting and bending; and electric shocks. Workers' comp claims can be avoided with proper precautions such as employee safety training programs.

Lifting and moving

Have your employees been trained in proper lifting techniques, and are they equipped with proper back braces with the required training to use them? The use of dollies for transporting machines and supplies will cut down on accidents including the common back strains.

In addition to safety training, a pre-employment physical will evaluate the applicant's fitness for physical labor since the nature of the industry requires him or her to bend, lift and move heavy loads requiring physical strength and agility.

Location of machines matters

The location and positioning of machines is critical since service and repair work is sometimes conducted in locations where there is high pedestrian or vehicular traffic. Some locations may make it hard for servicers or repairers to maneuver equipment and service machines. Vending operators should consider these factors when placing machines on locations.

Servicers and repairers are exposed to hazards such as electrical shocks from equipment, burns from heating units, and cuts from sharp tools and metal objects. They are also subjected to bumps, cuts, and finger and hand injuries while opening and closing machines.

Servicers and repairers should be properly trained in safety procedures and provided with protective wear, such as goggles, gloves and back braces. In addition, machines that are bolted to the floor protect the employee from machines tipping when they are being serviced or repaired.

Driver over-the-read training

One-quarter of on-the-job deaths are caused by highway crashes and, unfortunately, this statistic is on the rise. A mandatory element of a risk management program is the review of all driving records prior to hire. If an applicant has a less than favorable driving record, you may want to detour from hiring this individual to drive around on your dollar.

Other important factors to consider are: 1) Are the vehicles up to safety standards and in good working condition? 2) Are the mechanics, brakes, tires, etc. checked regularly? 3) What is the frequency of travel and radius of operations for a typical route?

Robbery exposure

Unfortunately, in today's society, robberies are climbing. Repair and service personnel may be subject to injury in a robbery or attempted robbery, as they collect money from machines. There are a number of things you can do to prevent such a misfortune. Trucks should have built-in, drop-in, fire-resistant safes.

Unfortunately, even if you and your employee have made every provision to prevent a robbery from happening, there is always the possibility that one may still take place. If your employee is ever put into this situation, your training program must strongly discourage them from resisting or apprehending robbers. Their safety and well-being far outweighs the loss of any worldly possessions.

Manage all claims aggressively

In addition to all of these efforts, a business has to manage every claim aggressively until it is dosed or out of the "experience rating period." The "rating period" for experience rating purposes goes back four years and nine months from your policy inception date. It's a long time to pay for your decisions, or lack thereof!

There is not a lot a vending operator or any other businessperson can do about most of the factors contributing to the recent jump in workers' compensation costs. An operator can, however, limit his employees' exposure to loss by implementing an effective risk management program.

Editor's Note: Information for this article was provided by several insurance sources. A key resource was Bill Werber of Westland Insurance Brokers, San Diego, Calif. Werber is a NAMA Knowledge Source Partner. He can be reached at 619-584-6400.

RELATED ARTICLE: How your workers' comp premium is determined.

An illustration using a $5.97 base rate with a $150,000 payroll

$5.97 x $1,500   (Rate times payroll divided by 100)
= $8,955         (Standard premium)
x 97%            (Experience Modification *)
= $8,686         (Modified Premium)
x 85%            (Scheduled Debits and Credits **)
= $7,383         (Estimated Annual Premium

* Experience Modification--Individual debit or credit determined by the bureau.

** Scheduled Debits and Credits--The way insurance companies reward or penalize customers based on underwriting criteria. These are the risk characteristics of the insured, such as years in business, management experience, employer paid medical insurance, above average wages, a return to work program, pre-employment physicals, or drug testing, and others.

Source: Westland Insurance Brokers, San Diego, Calif.