Understanding Underwriting: What Restaurant Owners Need to Know

In this episode of the Self Insurance Podcast by CRMBC, host Kaya interviews Scott Gaffner, CRMBC's Chief Underwriting Officer, about the intricacies of workers' compensation self-insurance in California. With over 30 years of experience, Scott examines the advantages of self-insured groups, the importance of underwriting, and the common misconceptions about self-insurance. 

He explains how self-insured groups offer lower costs and superior risk management compared to traditional insurance markets. Scott also sheds light on how self-insured groups are resilient to market fluctuations and provides insights into aligning members within these groups for maximum benefit. Join us for a comprehensive discussion on why self-insurance can be a strategic choice for large entities.

00:00 Introduction to the Self-Insurance Podcast
00:22 Meet Scott Gaffner, Chief Underwriting Officer
00:37 Scott's Journey into Self-Insurance
02:54 The Importance of Underwriting in Self-Insurance
04:53 Addressing the Risks and Benefits of Self-Insurance
09:15 Understanding Experience Modification (XMOD)
14:32 Flexibility in Underwriting for Self-Insured Groups
17:06 Navigating Market Conditions in Self-Insurance
18:17 Conclusion and Final Thoughts

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Transcript

 Welcome to the self insurance podcast brought to you by CRMBC. Every week, we're interviewing industry experts, restaurant operators, and brokers to talk about the world of workers comp self insurance in California. 

Today, I'm welcoming Scott Gaffner, our chief underwriting officer of CRMBC. Welcome, Scott. 

Hi Kaya, great to see you. 

And I see the Michigan State basketball behind you. Go green. 

That is normally there, but I kept it there because I knew you would appreciate that.  Go white. 

So Scott, you have been an underwriter for quite some time, and you've also been involved with self insurance for quite some time.

Before we dive into underwriting, especially for self insured groups, tell us a little bit about your background and your history. 

Yeah, absolutely. You know, I actually chose this profession. Most people in insurance always laugh and claim that they landed there by accident, and I'm one of the rare ones that sought it out.

My father was in the industry, and so I got a degree in insurance and risk management. I was planning to be a broker, but my dad gave me sound advice and said, go be an underwriter first to really learn the business, and then that will help you in your career to understand that side. Well, I went to underwriting, and I never left.

I fell in in love with self insured groups and the alternative risk model about three years into my career. And so now I've been working intimately with self insured groups for March marked my 30th year. So just over 30 years of being involved with self insured groups, really from all aspects, from underwriting, claims administration, loss prevention, payroll audit. Group governance, it's, it's where my passion is, and so just never had a reason to go elsewhere. I've enjoyed it too much and got to meet way too many great people along the way.  

And we've only been working together for a little bit over a year, and I can tell you I sleep easier at night knowing that you are overseeing our underwriting.

But tell me a little bit about why you, you've been in all of these different areas. Why did you land in self insurance and what do you like so much about self insurance? 

I immediately, when I saw self insurance, I recognized that that was absolutely the most equitable way for any entity to ensure their workers compensation risk.

It was, if you're large enough self uninsured on your own, that's, that's the absolute best. But not many people are large enough to retain that risk on their own. So second to that is self insured groups, and it's a close second. There's not significant differences, but self insured group model is absolutely, at the end of the day, the lowest cost of ownership for members of a, and I always, as we talked today It's, I'll qualify it by a well run self insured group, which 95 percent of groups out there are well run.

They're, I've spent part of my career also rehabbing groups along the way, but for the most part, they are absolutely well running organizations because they self police very well. 

Give us a little bit of background for people who are listening who don't fully understand the importance of underwriting.

What, what What does that mean? What is underwriting? Why is it significant? So 

the underwriting is at the core of a self insured group because if you look at it, any member within a self insured group effectively are becoming business partners with everybody else that's in that group. So from an underwriting standpoint, we have to make sure we're aligning people to be partners in this co op, in this nonprofit organization with others that see the world the same way, and when I say see the world the same way, I mean they recognize they have skin in the game, they recognize they do have the ability to make their workplace safer, they recognize that they do have the ability to aggressively partner with the self insured group, with the TPA,  with everybody involved to control claims, get their injured employees back to work and move on and have a great outcome on the claim. And so in underwriting, we have to see, we have to make sure we understand who those people are in the industry. We have to make sure we understand and see that they are somebody that buys into that concept.

And that they do control their costs and understand the model they're getting into and it doesn't take long really to be able to determine that once we determine who is a good fit and who has the same philosophy. Then it's very critical. It's a critically important that we make sure that we're charging them enough or that they are, I should say, in another way, they are contributing the proper level that they are covering their costs and the expenses of the program at the same level others are thus that anyone we add is becoming a a positive member or to versus somebody that's going to decline. take away and have to be subsidized by others. So they're, they're a positive add and will add value to the overall program. 

Talking to you, Scott, always is just like music to my ears because this is what we're trying to get the word out to so many people in California right now and there's brokers literally that will say to us and say to their clients, don't do this. It's too risky. And you understand, as I understand that. There's risk in anything, but self insurance and, and stand alone self insurance, self insured groups also, they, people, the members fare better over time than they do going into the traditional market, which is like a casino where the house always wins.

They're always gonna make a profit. So you just gave us some of the keys to properly underwriting someone for a self insured group. How do you respond to someone saying it's too risky? What's your response to that?  

Well, I'd say it's too risky not to be a self insured group because you're at the mercy of a whole lot of players that don't have the same level of interest as those that are servicing a self insured group.

So you know, it's, it's really nice. Self insured groups are regulated in each state by a department that understands self insurance and regulations are such that we make sure that we protect the employers and think about it, but the primary reason of workers compensation and the thing that is none of us should lose sight of is the key reason is to take care of injured employees and get them back to work.

And so regulations aren't going to allow for mechanisms or employees could be left high and dry. and not have somebody to take care of them. So the protections that we have in place with regard to regulations and making sure that we buy excess at the appropriate level, you know, we set aside a certain amount of money and if, if we don't have enough money, you know, we have excess insurance that kicks in.

So we make sure that what we're retaining on any occurrence, we can easily, we can handle. And then above that, we have excess insurance that will step in and make sure that all of our expenses are covered. So, and then if, you know, if, as long as we're adding the members that I mentioned earlier, with the philosophy that they have.

It goes well. I, I honestly, in my career of 30 plus years working with self insured groups I can't think of a single group that went out of business for financial reasons. 

So that brings me to the next question. What are the reasons that they did go out of business? What makes a self insured group fail?

They lose sight of the mission. I mentioned earlier, the mission is to take care of injured employees and get them the best care you can and get them back to work, and so you have the lowest cost of ownership for workers compensation.  When you lose sight of that mission, for various reasons, let's say you have you have, there's several entities or parties that are involved in a self insured group.

You've got the board, you've got a group funded administrator, you've got a TPA, you have auditors, you have a lot of different players. If any one of those players gets greedy and doesn't look at it as a team that I'm on and the mission is to provide low cost workers compensation to the members. As soon as one member loses sight of that and tries to get greedy, that can make a group go south.

If you have an underwriting model that is all about, I want this group to be a big group versus I want this group to be responsible and healthy, you could easily fail as a group because you're not charging enough for the member contributions. You know one, one big pitfall is a lot of self insured, I shouldn't say a lot of self insured groups.

When people don't understand self insured groups, they first look at it and just want to compare price up front with the marketplace. And that is very dangerous. If you look at the model, this is a non profit owned by its members. One thing that I always say about self insured groups is you can't overpay because no matter what you contribute to the fund, at the end of the day, it's The remaining money we call surplus, and that surplus is owned by the members, and oh, by the way, while it's sitting there, it's earning interest income.

So, members get this money back as surplus, so, but it is a pitfall to look and try to, if someone tries to be the cheapest every year going into it, The model doesn't work that way. It will be the lowest cost of ownership at the end of the day,  but that's another pitfall. 

But speaking of which, this is a good point that you make, because people who are just shopping rate, and commercial insurance companies are known for, we say buying business, but giving these artificially low rates to get the business.

And then let's talk a little bit about what happens and talk about the XMOD and how that impacts them in the commercial market and then what you, how you handle that when you're underwriting for a self insured group.  

It's a great question. You know, carriers, because it's their for profit and if they make money on any fund year, they keep those as profits.

They're not surplus owned by the members. They can dip into those profits from year to year to, to be competitive up front and try to entice insurance to, to, to insure with them. And, and then what happens is over time, they'll creep that premium up. In addition to that, the, the level of service provided by.

The vast majority of, of insurance companies doesn't meet the quality of a, of a third party administrator who's adjusting those claims. So what happens is if you look at those with primary, those insurance with primary insurance, at the end of the day, you're going to see an increased claim costs. You're not going to see the level of attention given to loss prevention.

And the other thing that's typically we see across the board is insurance companies like to reserve for more of a worst case scenario or what we call maybe over reserving. Well, all of those have an effect on the insurance experience, which is directly reflected in the experience modification.

So, in a way, not only they are in, well, not only, not in a way, they are in a mechanism where they're not receiving as good a service, and their costs are greater, but it's only going to hurt them because their experience mod is going to creep up, and then ultimately they'll be charged more for their insurance, and they look less desirable to others that may be underwriting them. 

Explain what the experience mod, the X mod is. 

So ExperienceMod is a measure of how any insured is doing relative to others in their industry. It takes three years of experience, excluding the most recent year, and it will compare their losses to statistically expected losses for others with their same class codes and their amount of payroll.

So then you can compare. If you're.  If an insured is completely average with others in their industry based on statistical losses from the past, they'll have a 1. 0 mod, meaning there's no variation to their premium. It's, it's a 1. 0 and it's the same. If you outperform the industry, you'll have a credit mod that's below 1.

0. If, if you outper, so that's for sake of ease of explaining, let's say your experience mod is 80 or you're 20 percent better, you know, then the, the industry, so to speak, you'll get. I, I, I, . 80 will be applied to your premium. You get a 20 percent lower premium. Conversely, if you perform less than the industry, or worse than the industry, I'm sorry, I should say, you will have what's called a debit mod, and it'll be above 1.

0. Thus, when it's applied to your premium, if it's 1.  2, you'll be charged 20 percent more.  So the experience mod really does affect not just premium, but also underwriting acceptability. If you will, when people look at your mod or other carriers, look at your mod, the first thing they look at is the, or you to ensure the first thing they'll look at is your experience mod to get a quick snapshot of how you perform relative to others in your industry.

And unfortunately, insurance companies have a big part of that because of the way that they handle claims and maybe set reserves. 

The harm that an insurance company does by giving artificially low rates plays out over time because these members go in thinking, I just got this great low rate, but the rate often isn't enough to cover a shock loss or isn't enough to cover their claims.

So then they get dinged for that later down the road. And that's a hard, hard concept for people to comprehend until it happens to them.  

It's exactly, that's exactly the accurate scenario, Kaya, in many cases, where you're enticed by a low premium, you pay it, and you forget about it. Right. It's a full risk transfer.

Inherently, we're designed that if we, in our mind, feel that we're just writing a check and then we're not responsible for anything, we tend not to pay as much attention to it, and we could get lost in that cycle where, wait a minute, we're All of a sudden I was, I was undercharged and now the effect is going to come up and, and bite me.

It's another thing I like about self insurance is just the fact that the, the mindset of when somebody knows their self insuring have skin in the game, they pay attention to things much more attunedly than they do if they're, if they're not. If they're, if they're just writing a check and forgetting about it and that's another thing that helps self insurance work so well. 

One thing that we've seen recently is, is restaurant owners that  this exact thing happened to them. They got dinged in the commercial market, now they're, they had, you know, one shock loss, and then their rates, you know, skyrocketed. And then they came to us, and we worked directly with you, because we were able to go look at their operations, and not make a decision strictly based on their XMOD.

We looked at, is this really You know, rampant in their business. Is this really who they are? Or was this just an anomaly? Can you talk about those,  that level of flexibility that you have underwriting a self insured group? 

Well, and I'll go a little beyond that and explain kind of the philosophy behind it, a couple of things.

And that is what I like to say is we underwrite to the current situation. And to, and to underwrite to the current situation, you have to take time looking under the hood at what is the current situation. And if you just look at experience mod, experience mod reflects on the past, and there are things in there that you have to validate to make sure they're still valid today.

For instance, if, if we get a, a, a, a prospect and they have a high mod, The first thing we're going to do is get detailed locks runs and start combing through those loss runs, not just losses over a certain threshold, but every single loss, start to start to look for trends, look for the quality of the claim adjudication that was in place for those claims that are driving the mod find out the situations that were in place and take time with the insured to understand, hey, what's changed since your experience rating period? Has anything changed? And then we take those things into account. You know,  when you have, when you underwrite one line of business for one industry and one jurisdiction, you can't help but outperform Others that aren't doing that same thing.

They've got multiple lines of coverage. They're underwriting. They have multiple industries in several jurisdictions We have the luxury of becoming experts and what we do every day Because of that and then that helps us as we evaluate these evaluate these risks to get them know to know them at a more intimate level to understand Is history going to repeat itself or are there factors that are changing it?

It may, it may also be something that's not even up to, it's them, it's just something within the regulatory environment or the industry in the state that we know might have an effect. So, We take it one step further to factor those things in and then we can move on a dime if we see some things that we know are anomalies are not going to happen again, we can make the decision right then that we're going to either discount that throw it out or how we're going to treat it. It's not, it's not a heavy bureaucracy that's driving it. 

Yeah, and we were able to do that with several members that just joined the group, and so that was a, that was a really big differentiator between us and traditional carriers. 

The other thing by, I'm sorry if I may real quick, the other thing about having those conversations with those insurance, there are sometimes light bulbs go on, and they recognize, wow, I really do have, can make a difference in this myself, and then it starts to create that higher level of partnership and controlling risk. 

Absolutely. Let's talk a little bit about the market. So, you know, one of the other objections that, that we hear is that in a soft market, you know, there's concerns about joining a self insured group. What is your opinion about this?  

Well, yeah, that's, that's a, unfortunately, a common mistake out there that people take.

Oh, when, when the hard market comes around, I'll look to a self insured group. And that's just simply an inaccurate way to look at it. If you look at the characteristics of what makes a self insured group work, that's agnostic to whether it's a hard market or a soft market. You're, again, I mentioned, you're doing one line of business. 

You're doing it in a single jurisdiction for a single industry, you have a higher quality of underwriting, you have a higher quality of claims handling. Everything that goes around it is much more refined, and you're going to continue to outperform. So, the same factor, or the same risk that you have of not being in a self insured group, are, are still there even in a soft market.

So if you think about it you know, whether it's a soft or hard market, really the key characteristics of why we like self insured groups and why we don't like the standard market, they still exist in both environments.  

Thank you so much, Scott. This is, again, like I said, we're so fortunate to have you on our team, and it's one of the reasons why CRMBC is performing as well as it is, is because I always say that there's, like you said, there's a lot of different stakeholders and players, but the biggest is the administrator, the TPA, loss prevention and underwriting because if the group isn't underwritten properly that that creates problems all the way around and people were not collecting enough money to cover people's claims.

So, Scott, thank you for what you do for us and thank you for being on the podcast today. 

Glad to be here Kaya. Thanks for doing this. Appreciate it. 

Thanks. Bye bye. Go green. 

Go white.  

Thank you for joining us for the Self Insurance Podcast, brought to you by CRMBC. If there's a topic you'd like to learn more about, or if you have any questions, just email us at info at CRMBC. com. Remember to subscribe, like, comment, and share, and join us again next week for more tips on self insurance.