How Workers Comp Rates are set. Workers’ Compensation rates are changing.
How Workers Comp Rates Are Set
Workers comp rates have increased significantly over the last couple of years. Many insurance specialists say that premiums will continue to rise into the foreseeable future. Inflated medical expenses, increased claim payouts, and a higher number of fraudulent claims have forced underwriters to raise rates. There are regulating agencies that be are stating employers can expect to pay an average of 5-7% more, but some companies may see as much as a 10% increase in premiums.
In most states, as in California, the law requires employers to carry workers’ compensation insurance on their employees. Failure to do so, can result in fines or penalties; not to mention the inevitable liability lawsuits that are sure to come. However, with rising costs, companies are trying to find ways to keep their expenses down. Insurance portfolios are one of the first places employers look.
Knowing how workers comp rates are calculated may help you save money. If you are able to give your insurance company accurate information, then they can provide you with the best rate possible for your situation. There are also important changes and policies that you can implement within your business to lower your premium. Be sure to ask your agent if there is anything you can do to offset some of these rising insurance costs.
How Workers’ Comp Rates Are Calculated
Workers’ compensation is administered by the individual States so policies may vary slightly; however, most States use the same basic calculation formula based on information obtained from the National Council On Compensation Insurance (NCII).
There are four main factors that ultimately determine the final premium amount:
- type of business or industry
- number of employees
- total annual payroll or employee salaries
- claims history
No matter which insurance company you use, they will all begin with a “base rate”. When you first register, you will be asked to give a very detailed description of your business. This information will be used to determine your company’s job classification(s). Each classification (or type of job) will have different rates based on the level of risk associated with it. For example, an office administrator would be less likely to suffer a workplace injury than an electrician or a security guard, so the base rate would be lower.
Most States use the classifications outlined by the NCII. Their categories are created from nationwide data and by very thorough research.
So, to begin with, your premium will be decided by what job classification(s) your company falls into and what percentage of your annual payroll is allocated to each relevant classification. For example, if you operate a trucking company, your accounting department may not necessarily be placed in the same category as your drivers. There is less risk of injury sitting behind a desk than operating heavy equipment on busy roads. Of course, you would have to show proof that your clerical staff would not be engaging in the higher risk tasks of operating equipment. If your bookkeeper also works in the warehouse, then he would not qualify for the lower classification.
The next step in determining premium is based on payroll or salary. Job Classification rates are translated into a dollar amount – or “risk factor amount” – for each $100 of payroll.
For example, an electrician has a risk rate of $1.40. So, if he makes $500 per week, his weekly workers comp rate would be $7.00, which is calculated by $1.40 *5 (500/100 – for every $100 of payroll). To get a total annual amount, you would do the same math using total annual payroll; divide by $100 and multiply by the $1.40 rate used for all electricians paid within the company. This would determine the total annual rate a business would pay for employees within this job classification.
When you are first insured, you will have no history, so your premiums will be determined using the base rates for your industry. However, after a few years, your claims experience will be used to adjust your premiums. This adjustment or modification (MOD) will become an important factor in how much you pay for workers’ compensation insurance. The better your claims experience (fewer claims and no costly claims) the lower your MOD will be adjusted.
Basically, once you have established some history, your insurer will compare your loss or claims record with all the other companies in the same classification. If you have lower claims costs and frequency than the average, you will pay less. However, if you have more claims or more costly claims than everyone else, your rates will be higher.
For the purpose of calculation, the average rate is given a numerical value of 1.0. This is also the MOD rate you will be given when you are first insured. If you have a good safety record, you may eventually be awarded a MOD rate of .80. This means that you will save 20% on your premium costs. On the other hand, if you have several claims, you may be given a MOD rate of 1.2, which will translate into a 20% premium increase.
Tips and Warnings
• Make sure employees are correctly classified. In California, as in many States, misclassifying workers is illegal and you could face serious consequences. Proper classification is important because it can save you money, but if you are intentionally misrepresenting your staff or business in order to obtain lower rates, you could find yourself dealing with a lawsuit if there is insufficient coverage when a claim is filed.
• Make sure to provide accurate information about your business. Again, under-reporting payroll or listing fewer employees than you actually have is fraud. When you give your insurance company correct information, you ensure that you will receive all necessary coverage at the best rate possible. Misrepresentation may save you money on premiums, but you could be facing legal issues and large penalties when the truth comes to light.
• There are several precautions and actions that you can take to keep workers comp rates lower and protect your employees form workplace injuries or illness. Establish a safety policy, set up a return to work program, and pay single visit “medical only claims” (smaller) expenses out-of-pocket. Your insurance agent should be able to offer helpful suggestions that can help improve your MOD rates so you can enjoy lower premiums.
• Your insurance professional is there to help you. However, if you are unsure about anything, consult an attorney, accountant, or a representative from the workers’ compensation board.
Workers’ Comp rates in California are rising, with some States experiencing a greater increase than others. Knowing how they are calculated and what you can do to build a healthy claims history can help you save a lot of money on insurance premiums.
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