Workers CompensationWorkers Compensation – Is your PEO making the grade?

In a recent post regarding the contraction of the PEO workers compensation market during 2014, we posed a series of questions.  Because workers compensation is at the heart of the PEO “value proposition” astute PEO executives recognize the need to protect their workers compensation programs and carrier relationships.

Long term program viability is a result of relationship (discussed in a prior post) and performance.  Forward thinking PEOs measure program performance closely, but they also ask themselves…

How does our current workers compensation carrier view our performance?

Workers compensation carriers are “for profit” business enterprises.  Carriers rely on several key business processes to generate profitable results—controlled risk selection (underwriting), good loss control, effective claims management, and investment income.  Carriers have a finite premium “capacity” that they can allocate to various types of risks.  Carriers active in the PEO space have made a conscious decision to allocate a certain portion of their premium capacity to the PEO space.  Each carrier then needs to determine how to best distribute available premium capacity to achieve the best (most profitable) return.  Because premium capacity is finite, you will want to be sure your workers compensation program is viewed favorably by your carrier partner(s).

Carriers may use any or all of the following measurements in determining the quality of a PEOs book of business:

  1. Blended book rate—carriers construct a blended premium rate per $100 of payroll as one way of determining how hazardous a book of business may be. Generally speaking, the lower the blended book rate, the less hazardous the book of business.  What is your PEO’s blended book rate?
  2. Loss rate—carriers will analyze historical losses (3-5 years) and determine a loss rate per $100 of payroll.  This loss rate will be developed (by actuaries) and used to determine the ultimate projected losses for your book of business for a given policy year.  What is your PEO’s loss rate?
  3. Loss ratio—carriers calculate and utilize loss ratios in determining client performance.  Loss ratio is losses divided by premium.   Loss ratio can be used as a measure of account profitability.  Each carrier has internal loss ratio targets they want to achieve to ensure the overall profitability of their book of business.  Do you know your PEO’s loss ratio?

If you are not aware of your PEO’s performance in the above three areas, now is a good time to meet with your carrier and ask them how they measure your specific performance and how you rank against their internal metrics.  Whether the news is good or bad, you will at least know where to focus moving forward.

Carothers-David-E150David E. Carothers, CSP, ARM is a founding partner of Praxiom Risk Management.  David is based in Tampa, FL but is retained as a strategic advisor to PEO executives nationwide.  To contact David directly you may email him at dcarothers@praxiom-rm.com.   You can also click here to connect with David on Linkedin.