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Controlling your workers comp premium
States control what employers must cover with workers compensation policies, but do not set your premiums. Instead, insurers use multiple variables to determine your risk level and how much premium should be paid. However, if you have good workplace safety programs and a proven record of low injury rates, you can qualify for various state-mandated credits and discounts once a certain premium level is reached.
The starting point for calculating your workers comp premium is the "base rate" for your state, which is a rate classification usually provided by the National Council on Compensation Insurance, and calculated using actuarial analysis of businesses in your industry. For example, the base rate for florists reflects the probability of any one florist making a workers comp claim, and is calculated using years of data.
Workers comp insurers classify employees using 700 numbered "occupational codes." (You can order a booklet listing these codes from the National Council on Compensation Insurance.) Most businesses receive only a few different classifications to describe their operations. When you first apply for workers comp insurance, your premium is primarily determined by what portion of your payroll is allocated to each classification, with different classifications carrying their own risks of injury. For instance, a small business with 20 employees, 15 of whom operate heavy machinery, is at a much higher risk of injury than a 20-employee business where everyone has a desk job.
based on each $100 of payroll.
"Rates are determined partially by classification, based on each $100 of payroll," explains Jim Royles, workers compensation line of business director for product management at The Hartford. "So a clerical employee might have a rate of $0.20 per $100 of payroll, multiplied by the number of employees in that category. Whereas a roofer might have a rate of $15 or $20 per $100 of payroll, because of the hazardous nature of the job and the employer’s claims experience. It's hard to pin down an average workers comp premium because it varies. There's a wide difference between a service-oriented situation, as opposed to high-hazard manufacturing, and you can see the disparity in the workers comp premiums."
years, an insurance company reconfigures your premium paymnet by factoring in an "experience modification factor."
A small employer with 10 to 20 employees pays, on average, between $7,000 and $10,000 per year in workers comp premiums, depending on the number of workers in risky positions.
After three years, an insurance company reconfigures your premium payments by factoring in an "experience modification factor" — a rating based on your claims history relative to claims made by others in your industry and state. Both the frequency of your claims and the dollar amounts paid out by the insurance company are considered, so your final premium reflects a combination of your losses and the insurer's expenses.
"There's a mandatory procedure for calculating experience modification," says Royles. "Each company has an 'expected loss' amount based upon a formula determined by the classification of the business and the amount of payroll. If a company's claims are higher than expected, a debit modification is applied to their premium. If they're lower than expected, a credit will be given. That's the starting point to determine the final price."
Your first year's premium is based on industry averages, but your second year premium can change, depending on your company's safety performance. The insurance company will audit your payroll, possibly making adjustments that will affect the premium. For instance, if you've added several workers in a risky category, that will be reflected in your premium.
Your premium: Keeping it down
Some insurers include a "dividend" in workers comp policies.
There are ways to lower your premium, though. The insurance company takes into account factors that might not be reflected in the experience rating: Did your company grow during the past year? Did you improve your workplace-safety programs? If the insurer decides these factors point to good loss-control in the future, you might garner a slightly lower premium.
Liberty Mutual, for one, maintains a three-tiered system for its workers comp policyholders. Standard policyholders don't receive much preferential treatment in terms of rates, and there's a bottom class considered poor risks who are doomed to pay higher premiums. But companies with proven safety track records and few claims can move into a "preferred" policyholder class, where Liberty Mutual gives special considerations. Usually, employers are rewarded for high safety standards by a premium calculated using a lower base rate than their state's average.
And, says Brenda Vincent of Marsh Advantage America, a service of Seabury & Smith, an experienced workers comp agency can take advantage of the room for negotiation in workers comp premiums. All sorts of credits toward your policy can be had, if you know where to look. For instance, in addition to the "experience modification," some states allow up to 15 percent additional credit toward workers comp premiums for good safety-management practices.
Some insurers can be convinced to include a "dividend" in your workers comp policy. At the end of the year, if your losses have been less than the insurance company predicted when calculating your premium, you'll get a refund on part of the premium. The insurance company has nothing to lose — it won't pay the dividend if you incur a large amount of claims, and it's a good incentive for employers to implement safety management in the workplace.
"In the past, insurers would give these credits to get business," says Vincent, "but now we really have to fight for the full credits. You really need extra muscle. Sometimes it's a matter of working closely with an employer before they can get the credit, even a few years of putting a safety program in place to prove that you deserve the credit."