Why is my workers' comp cost so high?
As I meet business owners, both large and small, the subject of workers’ compensation is often brought up. One of the most common questions I get is “Why is my workers’ compensation insurance so high?” For those that have never had a bad claim, the premium for workers’ comp insurance seems very high, especially compared to their other lines of coverage. So let’s take a look at workers’ compensation and answer this question and some ways of controlling and lowering this cost.
Workers’ Compensation Overview – How premium is calculated
Workers compensation premium is calculated based on estimated payroll multiplied with the rate for each respective class code. The sum is then multiplied with the Experience Modification Ratio (EMR) and credits and debits are applied. With the addition of fees, expense constant, terrorism charges, the final premium is calculated.
Class Codes and the Type of Business
First we need to address the difference of the class codes for each type of business. The National Council on Compensation Insurance (NCCI) sets the guidelines on which class code applies for each business. The Scopes Manual lists each class code and gives an explanation of who, what and why each class code applies.
Rates for each Class Code
In North Carolina, the NC Rate Bureau recommends the rates each year for each class code but the commissioner of insurance has the power to approve the rates. To simplify, the rates are compiled by looking at past historical results for each class codes. This is why a roofer has a higher rate than an accounting firm. The rates fluctuate from year to year.
Insurance Companies’ Rates
Each workers compensation insurance carrier has the ability to adopt the rates set by the NCRB and use a multiplier called Loss Cost Multiplier (LCM) to set their individual rates for each class code. The carrier also has the ability to file for apply scheduled and filed deviations from these rates in the form of credits and debits. Some insured’s think that all carriers have the same rates in workers comp. The fact is that with the LCM and credits and debits the difference in the rates and premium from carrier A and B can be substantial.
Experience Modification Ratio (EMR)
The Experience Modification Ratio (EMR) or what is typically referred to as “the mod” is a ratio of actual losses divided by expected losses over a three year period. If losses exceed expected the ratio is above 1.0 and the organization is penalized by this factor. If losses are less than expected, the ratio is below 1.0 and rewarded by this factor. The data for the mod is calculated each year by NCRB or NCCI, depending on which state you are in, and uses the data in the form of class codes, payroll and losses provided by the insurance carrier each year.
What is in Your Control
What you do dictates which class code you are in and the historical cost impacts the rate for this particular class. Since each carrier makes the decision which rates they use in the form of LCM and scheduled deviation, there is as previously discussed, choices to be made on which carrier you use. Some of the factors that impact your cost of workers comp are the class codes, the mod and having a solid return to work program.
Is Your Class Code Correct?
Analyzing the class codes can make a big impact on your overall premium. Doing a side by side comparison of the insurance company’s audit to ensure proper class code is used, overtime is split out, executives and owners are coded correctly. This should be built into the service plan, typically about 4-6 weeks after the conclusion of the end of the policy year. Errors in the audit can be reviewed and challenged three years backward.
Is your Mod Correct?
Since the carrier reports the loss data each year to the carrier, this is a crucial step that you want to pay particular attention to. What is used in the mod is total incurred cost of each claim at the time the data was reported. If you have open claims with reserves, the reserved amount is used as well. Having your insurance professional analyze your loss runs as part of your service plan sometime between three to four months into the policy period is crucial to ensuring your mod is correct.
Return to Work – The Impact of Lost Time Claims
Medical only claims that do not result in more than seven days away from work are discounted by 70%. This is an important factor to consider when dealing with a return to work situation. There are many other benefits to a solid return to work program, but this alone can save multiple points on the mod and also impacts for three consecutive years.
The above three methods applies no matter which carrier is used and an important part of each clients overall risk management program.
Jacob E. Dahlin is a Commercial Lines and Risk Management Specialist at Mountcastle Insurance Agency in Winston-Salem, NC. He can be reached at jdahlin@mountcastleinsurance.