Risk Management for the Staffing Industry

By: Bob Barrow
Date: 1/1/2007

A known leader in the staffing industry, Bob Barrow, shares his thoughts in an interview conducted by Neelie Worrab of Who Wants to Know:

Q. What are the elements of the business - you now find so interesting - that keep you innovative and creative?

A. I entered the insurance industry in 1981 after teaching school for several years. Having anticipated a stoic and uneventful career, where every day was much like the one before, I was delighted to be proved wrong. It's a non-stop whirlwind of change! Almost all aspects of the industry are in constant flux, so it takes a considerable amount of reading just to stay current. During my first years, I experienced the incredible good fortune of working for a direct-writing workers compensation carrier and I was given opportunities for in-depth training whilst working side-by-side with underwriters, loss control experts and auditors. This experience was invaluable in opening my eyes to opportunities that exist when you respond to the many, and diverse, needs of business owners.

My greatest satisfaction comes from creating new programs for our clients. It involves meeting with reinsurors, captive managers and underwriters. Creativity is a must for taking on this endeavor. We launched a group captive, in the Caymans, for the PEO industry in 1994. Though there are two captives currently serving the staffing industry, the challenge is there to construct other well-designed programs because the staffing industry is still suffering from a somewhat distressed workers compensation market.

Q. In a nutshell, what are the advantages of a captive?

A. Unlike traditional insurance companies, captives can enable you to reap underwriting profit and investment income. By financing workers compensation with a captive in which you either rent or own, the fixed costs are "flat-lined" over the years, thereby providing a long-term solution to predict your insurance costs. This, obviously, is desirable for any company that plans a long-term existence.

Additionally, the captive can be structured so that you have a vote as to who will be the vendors, such as: the reinsurer, front carrier, third party administrator and manager. You can "line item" the fixed costs instead of purchasing the complete service package from a guaranteed cost program.

Q. Why would anyone want to rent-acaptive?

A. Ah, the agony of decision...To own or lease that shiny new car; the choice to rent a conveniently appointed apartment, or to purchase that dream home in the suburbs. The same kind of dilemma exists when considering a captive to finance your workers compensation: Quite simply, choosing to rent-a-captive provides an opportunity to "try before you buy." It also provides a smaller firm with the opportunity to enter the captive arena. If you find that the arrangement works well for your company, you could then either join a group captive with ownership potential or incorporate your own - if your premium warrants.

Q. What does retrospective rating offer a business owner?

A. Although it does have a downside, for the savvy business owner, retrospective rating offers greater flexibility as a riskfinancing vehicle to both the insured and the carrier. In essence, there exists an infinite number of variations on how your retro plan may be structured. The factors ultimately selected will be based on your appetite for risk; your willingness to control claims and how well you negotiate with your carrier. As the word "retro" implies, the final cost of a policy is determined by looking back at the losses and premium after the policy year is complete with all the claims closed out. Adjustments are then made with an additional premium either being paid, or returned.

Q. I've heard that some employees will use "loopholes" to stay out of work on disability; what can be done to curtail this abuse?

A. In addressing your return-to-work policy, loopholes scream for attention; there are many, and they need to be addressed systematically. One surefire way of controlling abuse while creating goodwill at the same time, is to encourage your claims staff to stay in touch with the injured employee to monitor their progress. This can certainly include athome visits, providing opportunities to better assess the claimants situation.

There are return-to-work companies that coordinate with the treating physician to determine the capabilities of the claimant and then find a job for that person within the job duties that are acceptable. In many states, the claimant is required to either take the job or be cut-off from Total Temporary Disability payments.

Q. What about an employee, returning from a two-week vacation, who reports a back strain on his first morning back at work, with no witnesses, and the details are vague and inconsistent...It smacks of fraud, doesn't it?

A. Workers compensation fraud is not without its victims. It raises insurance premiums for businesses, prevents pay raises, and diminishes profit-sharing plans. If left to fester, it can rattle the economic survival of a company. Inevitably, the increased costs are passed on to that faceless gray mass. Yes, the consumer foots the bill for the claimants who file false claims; malinger while on temporary total disability, and file for injuries that happen away from the workplace. Fraud hurts everyone!

High company morale encourages employer-employee communication along with a holistic approach to workers compensation, and this will dissuade many of the injury predators out there. On the front-end of employment, background checks are key to hiring good, honest people. The need for disability programs will always be there, but they should be available only to those truly in need of their protection.

Q. How important is a return-to-work program?

A. It's absolutely critical to motivate the claimant to return to work at the earliest time possible. The morale and psyche of the employee and co-workers are affected. If they observe the hands-on treatment and administration of the urgency of returning to work, they'll accept that the corporate culture is to return to a productive role. This will significantly reduce the claim-loss attributed to Temporary Total Disability. Some claimants that retain counsel for their injuries do so because they feel as if they were either forgotten or neglected. If they're not back to work, they could be watching the "Are you injured on the job?" commercials that run on mid-afternoon television; feeling sorry for themselves.

Q. Is workers compensation really a profit center for the staffing industry?

A. In underwriting, one of the carrier's usual criteria is to review the financials of an insurance candidate. I'm not aware of any staffing firm that generates income from workers compensation insurance because it's always a line-item expense! Even in the world of PEOs, where the object was to purchase workers compensation at one price and re-sell at a higher price, thereby creating a profit center, the days of pure workers compensation arbitrage are in the distant past.

Q. Why is the staffing industry your focus?

A. The staffing industry provides unique challenges in risk management, coverage placement and technical knowledge. Our first staffing client, written in 1982, was a day-labor firm in the inner-city. Although we had a niche in the PEO industry for several years, in 1999 we decided to focus exclusively on staffing, and we have assisted hundreds of staffing firms with their coverage needs. The decision to be knowledgeable in one area, rather than a generalist in all, has proved to be rewarding in many ways for us.

Q. Where is the market headed?

A. Even though the insurance marketplace hasn't totally opened up to embrace staffing, and is still underwritten very closely, the market is stable. Though some programs, through necessity, have tightened up on their underwriting, there are now other new programs that have opened up. Significantly, the reinsurance market has stabilized after the decimation of 9/11, and the carriers, that underwrite staffing firms, have found that their reinsurance renewals are staying pat. Of particular importance to staffing companies is the need to closely monitor claims and class codes because these two items are the first concerns of underwriters. Barring any succession of major natural catastrophes or major economic depression, the market should remain stable or, perhaps, even soften slightly.

Q. Why the lion?

A. All my life I have been greatly influenced by that great statesman, Winston Churchill, who was known as the British Lion. He asserted that he was, in fact, not the lion but, rather, the roar of the lion. I wanted my business to reflect that high-minded integrity.

Barrow Group, LLC, already a specialist in the captive industry, leads the way for the staffing industry in insurance products that include: Various Workers' Compensation programs, Risk Management, Health Employee Benefits, Staffing Services Liability, Human Resources Consulting and Payroll Processing.

Bob Barrow CIC, CWCA is the president of Barrow Group, LLC. He can be contacted at 800.874.4798, or by email at bbarrow@barrowgroup.com, or vist www.barrowgroup.com.