Premiums for workers compensation insurance policies are rated by the risk of claims against the policy and the potential cost of claims based on state and national averages. Premiums are determined by several factors:
- How much employees are paid- expressed by actual payroll;
- The type of work the employees do and how hazardous that work is, (job class code); and
- The claims and safety history of the company are expressed as an “experience modifier.”
Insurance applications are completed with the help of an insurance broker and then sent to the insurance company’s underwriter who reviews the employee job classification and assigns a rating.
The premium amount at the beginning of the policy year is an estimate based on the company’s annual salary projections and is subject to change as the payroll is audited throughout the year. Once the policy is in effect it covers all employees working for the company in that state except executive employees who have opted out. If additional employees are hired during the policy year those employees will be covered automatically, but if they are under a different job class code the policy should be updated to reflect that.
Safety Results in Lower Premiums
Insurance companies use factors called experience modifiers or e-mods as part of their premium determinations. E-mods are based on the frequency and severity of claims as determined by each employer’s insurer data. The 1.0 modifier is the average for the industry. New businesses start with a modifier of 1.0. Companies with above-average safety and claims records may see their modifier drop to .80 or .70 over time. Conversely, high-risk businesses have their modifiers increased to 1.20 or 1.30.
Let’s see a basic example of this. For simplicity, let’s say we have one firefighter who earns $100,000 in annual payroll living in the state of Oregon. Premium is calculated per $100 of payroll so we take $100,000 and divide it by $100 which equals 1,000. We then multiply 1,000 times the rate for that job class code. In this case, the rate for a firefighter in Oregon is $4.93 per $100 of payroll. So, 1,000 multiplied by 4.93 equals $4,930 in premium for a 1.0 experience mod. To apply different E-mods we multiply the base amount of $4,930 by our E-mod. A safe employer with an E-mod of .70 would pay $3,451 in premium and an unsafe employer with a 1.3 E-mod would pay $6,409 for the same policy.
The E-mod is used as a multiplier for the total premium and is thus a powerful incentive for employers to adopt a safety-oriented workplace. An employer with a good safety record will enjoy much lower policy premiums than an unsafe employer in the same industry. A good safety record becomes a competitive and financial advantage that increases the bottom line. Workplace safety also affects costs in other measurable ways such as lower employee turnover, reduced training costs, and reduced time spent on claims related to accidents and injuries. Safety awareness is part of an effective workplace and can help make a business more profitable.
Rates in the Assigned Risk Pool
Insurance costs are higher in assigned risk pools than in the voluntary market. Policyholders in assigned risk typically pay an additional 10 percent of the base premium. Additional fees are regularly added to premiums within this group because of the increased risk of claims. If possible, companies should have a long-term goal of exiting the assigned risk pool by seeking coverage in voluntary markets or becoming self-insured.
Insurance companies typically review payroll at the end of the policy year and adjust the final bill to the premium amount due based on actual payroll and the type of work performed. If the audited salary differs from the estimated salary at the start of the policy period the company will receive an invoice for the additional premium and if the salary is reduced the company will receive a refund. Companies that increase their workforce should remember to include additional premiums as part of their insurance costs.
Employers can expect carriers to audit their payroll annually at a minimum. Carriers do this to ensure that the premiums they collect are sufficient to cover the risks they insure. One benefit of regular audits is that employers are only charged for what they need; any excess premium is usually refunded, or applied to the renewal policy.
Common Audit Disputes
Insurance carriers may claim that certain people should be covered as employees and that the employer is responsible for paying related premiums. A disagreement over premiums usually occurs if the employer considers these individuals to be independent contractors rather than employees. It is important to know the difference between an independent contractor and an employee. Each state has its own definition of who and what qualifies so be sure you are using the definitions for your state.