Case Study: How a California Lumber Company Cut its Workers Comp Spending*

Ganahl Lumber

Ganahl Lumber has been family-owned for more than 100 years. The company has nine locations in Southern California.

With prices for guaranteed-cost workers compensation insurance rising, employers weighing whether to assume greater risk by moving to a large deductible plan might consider Ganahl Lumber Co.’s success record.

When workers comp rates for California employers “were going through the ceiling” 12 years ago, Ganahl stopped buying first-dollar coverage and instead purchased a policy with a $250,000 per-claim deductible, said John Ganahl, chief financial officer for the Anaheim, Calif., employer.

Each year since then, Ganahl has saved at least 50% in total costs over what it otherwise would be paying for a first-dollar policy, Mr. Ganahl said. The savings have resulted even when factoring in loss expenses, the cost of collateral that insurers demand when providing a guaranteed-cost policy, third-party administrator expenses, and the premiums Ganahl pays for the coverage with the $250,000 deductible.

“Adding up those costs and comparing them to the cost of a comparable first-dollar policy, we have been significantly ahead in every single one of the 12 years,” Mr. Ganahl said. “In other words, we are happy to be our own insurance company for the first $250,000 in claims because we have done very well.”

But the move to a large deductible may not be for all employers, Mr. Ganahl warns, and workers comp insurance experts agree with his assessment.

More employers are weighing whether to take on more risk with a larger deductible policy, or they are making the move, because of the rising price for guaranteed-cost policies, said Stephen B. Paulin, with Orion Risk Management in Newport Beach, Calif., and Ganahl’s broker.

Several recent surveys have documented the rise in workers comp insurance pricing.

For example, MarketScout, a Dallas-based electronic insurance exchange, reported this month that workers comp rates increased 6% during June, with the smaller the account the larger the increase. This follows successive increases over the previous six quarters.

Before abandoning a guaranteed-cost policy for a large deductible, however, considerations employers must adequately weigh include their company’s risk tolerance for paying first dollar on claims, the company’s financial strength, and their loss history, Messrs. Paulin and Ganahl said.

While Ganahl, with about 625 employees, has been “a prototypical success story,” reaping finical rewards for turning to a large-deductible policy, not all companies that made a similar decision a decade or so ago when California rates were rising rapidly have fared as well, Mr. Paulin said.

“There were businesses that thought they knew what their risk tolerance was and thought they were able to handle it,” Mr. Paulin said. “The reason they considered a large deductible is because the guaranteed-cost premiums were so shockingly high compared to where they were a couple of years before. They really didn’t have a choice financially. But some of them had good success, others didn’t.”

Today, however, more brokers are recommending that midsize clients engage an actuarial report on their claims history before shifting to a large deductible plan, Mr. Paulin said.

The primary reason for the review is to improve the business’s understanding of how their future claims risk could impact their cash flow and whether taking on more risk makes sense for them.

Secondly, though, the actuarial review can help the insurance buyer in negotiations with insurers over the amount of collateral the underwriter will demand, Mr. Paulin said.

Insurers demand collateral with large deductible policies to guarantee that, should a policyholder fail to meet their obligation to pay claims costs within the deductible, the underwriter will not be left holding the bag.

A policyholder’s cost for letters of credit depends on their company’s financial strength, Mr. Ganahl said.

“You can’t even talk large deductible if you don’t have the ability to have letters of credit that are significant in size,” Mr. Ganahl said. “A company has to be in good financial shape. We are.”

Some employers that switched from a guaranteed-cost policy to a large deductible 12 years ago, though, saw it as a short-term move, Mr. Paulin said. They planned to move back to a guaranteed-cost plan once the work comp insurance market eased.

“The problem was, they were still saddled with a letter of credit for hundreds of thousands of dollars that that stuck with them” for several years, which amounts to a liability on the company’s balance sheet, Mr. Paulin said. Insurers hold the collateral over time until long-tail workers comp claims are properly closed.

Employers looking to take on more risk also need to consider whether their safety strategies will reduce the losses for which they will be responsible, Mr. Paulin said.

Ganahl Lumber encourages safe practices with several measures, including allocating claims losses to the individual business locations where injuries occur, Mr. Ganahl said. That keeps location managers aware of the financial cost of accidents.

The feedback operating managers receive on their unit’s losses also is much quicker than under a guaranteed-cost program, Mr. Ganahl said. Under a first-dollar coverage plan, losses impact an employer’s experience modification rating and, over time — perhaps a few years — impact the employers’ premiums.

By that time, an accident has “almost no (financial) relevance to the managers involved,” he said. But under Ganahl’s current system, local managers see the financial impact on the unit’s profit and loss reports within one to three months.

“You have a very short loop between the accident and the cost of the accident,” Mr. Ganahl said.

In the end, Mr. Ganahl said taking on more risk “has been a very good thing for Ganahl Lumber,” which is why he hasn’t looked back since.


Reproduced with permission of Business Insurance Magazine

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