Why Safety?
Issue #39
January 14, 2008
There are several reasons for a business to operate safely, including; to protect the lives of their employees, to be in compliance with their legal obligations, and to save money. This issue of risKey will look at the real cost of workplace injuries and the financial impact they can have on a business.
Workplace injuries cost your company money in two ways; increased workers’ compensation insurance premiums and indirect costs.
Workers’ Compensation Insurance Premiums
An employer’s premium is based upon their payroll times a rate set by actuaries for the employer’s industry classification. This is then multiplied by the employer’s loss experience factor to arrive at the final premium.
The employer’s loss experience factor is based on three years of actual losses. Each claim that occurred during the three year experience period affects the factor that is used to modify the employer’s final premium (experience modification factor, or Mod).
Example
In this example, a $7,546 claim paid by the insurance company increased the employers’ Mod factor by 3.42 %, which is then used in the calculation of the employers’ final premium for a 3 year period, resulting in a total increase in premium of $21,408.
Indirect Costs
Accidents are more expensive than most people realize because of the hidden costs. This includes costs that are not covered by insurance, such as:
- Costs to hire and train a replacement worker
- Repair damaged property arising from the accident
- nvestigate the accident and implement corrective action
- Maintain insurance coverage for absent employees
- Schedule delays
- Shutdown and startup costs
Studies show that the ratio of indirect costs to direct costs varies widely, from a high of 20:1 to a low of 1:1. OSHA’s approach says that the lower the direct costs of an accident, the higher the ratio of indirect to direct costs. Their studies have shown that the claim used in our example above has a ratio of indirect to direct costs of 1.2:1
Direct cost: $7,546 (This is the amount paid by the insurance company)
Indirect cost ratio: x 1.2
Indirect costs: $9,055
Business Impact
The total cost of this $7,546 claim is:
Increased premium cost: $21,408
Indirect cost: + 9,055
Total cost: $30,463
Now you can calculate, based upon the employer’s profit margin, the amount of sales needed just to pay for this one claim.
As you can see from this example, a small investment in safety can have huge returns for an employer.
Kempkey Insurance Services provides insurance and risk management consulting to growth oriented businesses. Ed Kempkey may be contacted by email at ed@kempkey.com or by phone at (888) 536-7539 extension 2188.