How are Workers Compensation Premiums Calculated?
Understanding how workers' compensation insurance premiums are determined is very important. Many calculations and comparisons are needed in order to customize each employer's insurance premium. These calculations and comparisons ensure employers in low hazard industries pay smaller premiums than employers in high hazard industries. They also ensure employers with few claims and good safety records pay less than employers with many claims and undesirable safety records.
The National Council on Compensation Insurance (NCCI) keeps the statistics necessary to differentiate high and low hazard industries and to differentiate high and low hazard employers within the same industry. The NCCI does this by combining the statistics of hundreds of insurance carriers in most states. Each insurance carrier writing workers' compensation keeps a claims record for each of their clients. At the end of each client's policy year, the carrier sends the client's claims record to the NCCI. This pool of statistics is then used to help calculate rates, classifications, and experience modifiers.
Examples of Rates per $100 of payroll for various Classifications:
$52.22 2702 LOGGING OR LUMBERING
$15.69 0083 FARMING-CATTLE RANCH
$13.71 7229 TRUCKING-LONG HAUL
$ 2.30 9154 THEATER-LIVE ENTERTAINMENT
$ 1.38 8833 HOSPITAL-PROFESSIONAL
$ 0.55 8810 CLERICAL OFFICE
Each classification code (there are over 600 codes used by NCCI plus hundreds of state specific codes) may represent entirely different industries or segments within different industries. For example, Code 2501 Clothing Manufacturing represents an entire industry, but code 8810 Clerical Office Employees represents a segment of employees within many different industries.
After an employer's operations have been assigned a specific classification and rate, their Manual Premium is determined by multiplying the employer's payroll by the appropriate rate. However, some compensation is excluded from Workers Comp premium calculations. All employers' workers' compensation premiums are based initially on their manual premium. Adjustments are then made to the manual premium for experience modification and other factors.
A company's classification code is usually determined by its insurance agent or insurance carrier. The NCCI defines the scope of work performed in each classification code and these definitions are contained in the proprietary and copyrighted "Scopes® Manual." Since many classifications are very similar, codes are sometimes difficult to determine. In these instances, an insurance agent or carrier may ask the NCCI to physically inspect a specific employer's operations and make the final classification decision.
How to Minimize Your Workers Comp Premiums
Because NCCI's own Self Audits show that carriers and agents have error rates of 30% to 40%, ABA recommends an independent review by an experienced Workers Comp Audit Consultant. These experts checks Classifications, Experience Modification Factors, payroll audits, and other rating factors that affect your premium. ABA's recommended Workers Comp Consultants have over 20 years of experience in exclusively serving employers nationwide, ranging from small shops to Fortune 100 corporations.
Most clients realize a savings of 25% or more of their annual Workers Comp insurance premiums.
Since most general insurance agents are not experts in all of the various complexities of Workers Comp, relying on your local general agent can be costly. You should know you need an independent Workers Comp Consultant if your local agent has difficulty in answering these three questions:
1. Is overtime and or bonuses included or excluded from Worker Comp premium calculations?
2. Can you show me the NCCI Classification Codes Manual for our Class Codes?
3. Which years are included in the Experience Modification calculation?
The Workers Comp Audit Consultant also reviews current and past Workers' Comp insurance policies, looking for technical mistakes that have caused premiums to be higher than they should be. Correcting those technical mistakes, produces lower current premiums, or a refund back from past policies, or a combination of both. Plus, you save on future premiums.
This kind of review is not based on your Workers Comp claims, so it doesn't matter if your company has had a lot of claims, or none at all. Workers Comp Audit Consultants also are available to provide expert testimony in legal cases involving Workers' Compensation premium issues or disputes on commercial property or liability coverage and/or cost.
Call or email ABA for more information or to confidentially discuss your Workers Comp premiums.
Tip # 2 - Challenge the Classification codes for your employees. Premium differentials for classification code errors are frequently missed and can cause premium rate errors over 100%. ABA's Workers Comp Audit experts validate all classification codes for your employees.
Tip # 3 - Always obtain and retain Certificates of Insurance from Independent Contractors and Subcontractors. Otherwise, you may be required to include payments to them with your payroll used to calculate Workers Comp premiums.
Tip # 4 - One of the ways a business may be able to save workers' compensation premium dollars is through the establishment of a drug-free workplace policy. Many states provide discounts of 5% to 7.5%.
Unfortunately, most employers and general insurance agents don't have the expertise or know the intricate details of how to minimize Workers Comp premiums. This is why ABA partners with independent Workers Comp Audit consultants that can help you challenge audit results, lower current premiums, and obtain refunds from prior policies, without changing your insurance agent or your insurance company. Risk-free contingent fees and hourly rates are available.
Errors and overcharges are far more common than many agents and carriers admit. The complex rules governing proper classification, experience modification factors (EMF), payroll audits, and varying state regulations mean that many employers are overcharged without ever knowing it. Contact ABA to determine how your organization can cut its Worker Comp costs.
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Phone 770-645-5989
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