Unlocking The Secret To Understanding Workers' Comp Costs

Workers' Compensation Insurance premiums are calculated by factoring employee classification. Employees are classified based on the specific type of work they perform and the rate assigned to each employee classification. 

Workers' Compensation insurers attach a premium rate to each employee classification code. These rates are approved by the state insurance regulatory agency in the state the policy is held. Rates must be sufficient to maintain the financial condition of an insurance company. Adequate rates guarantee to a degree that the insurance company is able to maintain a surplus and pay current and future claims.

The classification code and its corresponding premium rate are part of the formula. The premium rate itself is expressed as dollars and cents per $100 dollars of payroll. The payroll for each classification code is estimated and then each $100 is multiplied by the rate. The calculated amount is the base premium. The base premium is then modified (change up or down) using rating plans and experience modification.

The experience modification is calculated from losses that the company has reported in the past. The insurance company used a government-approved formula to calculate an experience modification for each employer.

The formula looks at paid losses, reserves necessary for claim made and payroll amounts for the past three years (usually). The experience modification shows average loss experience of employers with similar classified employees and works as a way to compare employers. The experience modification is added to the class rate, along with any other modifications and an estimated premium rate is created. This is called prospective rating and is the most commonly utilized rate plan.

The total premium for a workers compensation insurance policy is not certain until the policy period is complete and all payroll has been reported. There is often a premium discount attached to a particular volume of estimated payroll and that number can be very different depending on the reality of actal payroll volume.

What's The Secret To Workers Comp Costs that Insurance Companies Do Not Want You To Know?

• Employee Classification 

Nine times out of ten employees are incorrectly classified for the work they actually perform. Different people view a particular job with their own bias. This can create as many different variation so of a job classification as you can imagine. The insurance agent could even choose a classification that benefits them by increasing your premium.  

The insurance company makes more money if there exists a higher premium rate classifications. The risk to the insurance company does not rise if the employee is misclassified into a classification that commands a premium rate of say $5.00 per $100 of payroll as say a rate of $1.50 per $100 of payroll.

The insurance company just makes ten times as much revenue. If there is a claim it will be paid at the same amount regardless of what the premium was. 
Comp Cutters will expertly review appropriate the classifications for your employees.