Article

Understanding Your Workers' Compensation Premium

What you know may help lower your rates.

Understanding workers' compensation premium

Important information that may help you lower your rates.  What you know may help you lower your rates.

Seeing an increase in the cost of your workers' compensation insurance premium may sometimes seem like just another increase by an insurance company. In reality, there's a specific method used to calculate your premium, and there are actions you can take that may reduce your costs compared to similar industries. Of course, other factors may affect your rate as well.

How is a workers' compensation premium calculated?

The workers' compensation premium is calculated using a variety of information, most of which comes from the employer's specific data from an experience rating period. Experience rating is a method of tailoring the cost of insurance to the characteristics of an employer. The workers' compensation premium is modified by an experience modification factor to more accurately price different employers. The calculation uses the employer's past experience to project future losses, and provides added incentive for loss reduction. It gives employers an incentive to manage their premium through the use of safety and cost-reduction programs.

What does experience rating do?

Workers' compensation insurance spreads or shares the cost of a loss with members of a group who are likely to experience similar losses. While the cost and probability of injuries for the whole group can be predicted with a fair degree of accuracy, it's impossible to determine which member of the group will be responsible for these costs.

The simplest rating method for workers' compensation and employer's liability insurance is "manual rating." With manual rating, all employers are grouped according to their business operation or classification. The Bated losses of the group are added and an average cost is obtained. The rates determined for manual rating are averages reflecting the normal losses found in each classification.

An employer is assigned to a classification to ensure the rates reflect the costs of all employers with similar characteristics. Although each classification contains similar businesses, each individual business in a class is different to some extent. Experience rating is designed to reflect these individual differences in loss potential.

To reflect the differences in employers, the rating system must be further refined. Experience rating is one such refinement. In workers' compensation experience rating, the actual payroll and loss data of the individual employer is analyzed over a period of time. The loss data is compared to similarly grouped employers to calculate the experience modification.

In general, an employer with better-than-average loss experience receives a credit on premium, while an employer with worse-than-average experience carries a debit, which increases premium. Experience rating takes the average loss experience and modifies it based on the individual's own loss experience. The two primary benefits of experience rating are that it:

  • Tailors the cost to the individual employer
  • Provides added incentives for loss reduction alone

 What is a workers' compensation experience modification factor?

One of the main components in calculating your workers' compensation premium is the experience modification factor, often referred to as the experience mod or mod factor. The experience modification factor is unique to each company and is based on a number of factors. Having a good understanding of your company's mod and the data used to obtain the mod will help you identify areas that could help reduce your workers' compensation premium.

In calculating the experience mod factor, your company's claims experience is compared to the experience of other employers of similar size and business type. The cost of insurance is tailored to the characteristics of a specific employer and gives the employer the opportunity to manage its workers' compensation and safety program in order to reduce its experience modification factor.

The mod factor, when used in the calculation of premium, represents either a credit or debit that's applied to the workers' compensation premium. A mod factor greater than 1.0 is a debit mod, which means that losses are worse than expected and an increase will be added to the premium. A mod factor less than 1.0 is a credit mod, which means losses are better than expected, resulting in a discounted premium.

Experience mods are calculated every year for each employer. For company mergers and acquisitions, individual company data is combined to provide an experience mod that reflects the new company.

Who calculates the experience modification?

The National Council of Compensation Insurance (NCCI) calculates the experience mod for most states. The NCCI State Map (https://www.ncci.com/Pages/AU_NCCIStateMap.aspx)is a convenient reference of states whose insurance departments have designated NCCI as the licensed rating and statistical organization. The information on experience modification in this article is based on NCCI.

States that don't use NCCI have their own rating bureaus, which have some form of experience rating built into the calculations. Four of those states — North Dakota, Ohio, Washington and Wyoming — are monopolistic states. A monopolistic state requires workers' compensation coverage to be provided exclusively by that state's designated workers' compensation program. Insurance through private insurance companies isn't allowed.

NCCI manages the industry's largest database of employee injury information and statistics. NCCI is the nation's leading provider of workers' compensation insurance information, tools and services. NCCI analyzes industry trends, prepares workers compensation insurance rate recommendations, assists in pricing proposed legislation and provides a variety of data products to more than 900 insurance companies and nearly 40 state governments.

How much information is used to calculate the experience mod?

The mod is calculated using loss and payroll data for an experience rating period. The experience rating period is usually three years of claim data, excluding the most recent year. For example, an experience mod beginning in 1/01/2014 would be calculated from the following years:

1/1/2011  to  1/1/2012

1/1/2010  to  1/1/2011

1/1/2012  to  1/1/2013

 

 The information for the calculation of the mod effective 1/1/2014 is sent to NCCI 7/1/2013.

 What data is used in the calculation of the experience mod?

There are many variables that go into the calculation of the experience mod. If you would like detailed information on how the mod is calculated, please see NCCI's ABC's of Experience Rating (https://www.ncci.com/Articles/Documents/UW_ABC_Exp_Rating.pdf). Some of the most important variables are the frequency, severity, payroll, classification codes and whether the claim is an indemnity (lost-time or impairment rating) or a medical-only claim.

Frequency — This is a reflection of the safety program and the management controls in place. To have frequency increase the mod faster, NCCI uses what is called a split point. The split point breaks claims into primary and excess losses. For many years (through the end of 2012), the split point was $5,000. NCCI proposed an increase to the primary/excess split point to an inflation-adjusted $15,000 over a three-year transition period, and an annual increase to this amount using a countrywide inflation index. Currently, the primary is the first $13,500 of a claim for 2014, increasing to $15,000 for 2015 and then adjusted for inflation yearly starting in 2016.

For example, if we used a claim whose accident year was 2014 and the claim was $25,000, the first $13,500 would be primary loss and the remaining $11,500 would be excess loss.

Severity - This is represented by the portion of the claim that is over the primary split point, or the excess portion of the claim. For 2014, this is anything in excess of $13,500. Each state also puts a cap on large claims, which can be as low as $150,000, or as high as $400,000. A significantly large claim will have only so much impact on the employer's mod. Excess losses represent severity in the calculation.

For example, in a claim with a dollar amount of $600,000, the first $13,500 is primary and the claim is capped at the state's large-claim cap. If the state's large-claim cap is $300,000, the excess on the claim is $286,500. The remaining $300,000 would not be used in the employer's loss data.

Classification codes - This is a three or four-digit code assigned by NCCI or a state rating bureau. Classification codes help differentiate between the various job duties or type of work performed by employees. Each classification code has a rate attached to it. Higher hazard classification codes have a higher rate than the lower hazard classification codes. Rates are different for each classification for each state and are based on the loss history in that state. The classification system contains more than 700 unique codes.

For example: 

 

IA

NE

IL

8810 Clerical office employees

.29

.33

.21

8304 Grain elevator operations

9.03

9.39

8.06

7228 Trucking-local hauling drivers

10.06

9.85

11.63

  

Rates for different class codes are per $100 of payroll when calculating the manual premium. Manual premium is calculated by using the classification code rate multiplied by payroll for that class code, divided by 100.

6.59 x (500,000/100) = $32,950

Payroll — This is part of the calculation of premium, as well as part of the calculation to determine expected losses. NCCI uses payroll divided by 100 for each classification to help determine the expected losses for each classification. For example, if you have $500,000 in payroll, expected losses would be 5,000 times the expected loss rate for that class code. Smaller companies with fewer employees and smaller payrolls are expected to have fewer losses than larger companies with lots of employees.

For example, if the expected loss rate for class code 8304 in Iowa for 2011 is 3.85, with $500,000 in payroll for that classification code, then:

3.85 x (500,000/100) = $19,250

In order to get the employer's expected losses, each class code's expected losses are calculated for all three years and added together with all class codes.

Medical vs. indemnity claims — Mod calculations reward employers who provide light-duty jobs or have a return-to-work program. When information on claims is sent to NCCI by insurance carriers, the information on the claim has an injury code that represents the severity of the claim. The nine injury codes include:

  1. Death
  2. Permanent Total Disability
  3. Major Permanent Partial Disability
  4. Minor Permanent Partial Disability
  5. Temporary Total or Temporary Partial Disability
  6. Medical Only
  7. Contract Medical or Hospital Allowance
  8. Compromised Death — CA only
  9. Permanent Partial Disability

In approved states, when a claim is medical only (no lost-time or disability payments), the calculation of the mod reduces the value of the claim by 70%. For example, if you have a $10,000 medical-only claim, the claim is reduced by 70%, or $7,000; only $3,000 is used to calculate the experience mod. For a lost-time claim, the entire $10,000 is used to calculate the experience mod; this is called an experience rating adjustment.

The following states have approved the experience rating adjustment: Alaska, Alabama, Arkansas, Arizona, Connecticut, District of Columbia, Florida, Georgia, Hawaii, Iowa, Idaho, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maryland, Maine, Michigan, Minnesota, Missouri, Mississippi, Montana, North Carolina, Nebraska, New Hampshire, New Mexico, Nevada, Oklahoma, Rhode Island, South Carolina, South Dakota, Tennessee, Utah, Virginia, Vermont, Wisconsin and West Virginia.

How can you use this information to reduce your experience mod?

The key to controlling your experience mod is knowing the variables your company can affect:

  • Frequency — Having good accident-prevention programs and enforcing polices and work practices will help reduce claims.
  • Severity — Having cost containment programs will assist in keeping costs down. Examples of programs that will help with cost containment include return-to-work programs and designated physicians in the states where it is possible.
  • Payroll — Unfortunately, payroll is not an area your company can impact much to change your mod.
  • Classification codes — Unfortunately, this is not an area your company can impact much to change your mod. Classification codes are approved by individual states and are based on loss history for that particular state.
  • Medical vs. indemnity claims - Aggressive return-to-work programs will keep more claims at the medical-only level, which will help in reducing the amount of money used in the calculation — especially if you are in a state that uses the experience rating adjustment.

The key to controlling your experience mod — and ultimately your workers' compensation premium — is accident prevention and controlling costs after an accident happens. Preventing accidents involves having good safety programs and enforcing those programs with your employees. Controlling costs involves:

  • Having designated physicians in states where this is possible
  • Developing a good return-to-work program
  • Having an effective accident investigation program
  • Training employees and supervisors on their responsibilities for safety and enforcing violations

To learn more, contact your agribusiness risk management consultant at Nationwide by calling 1-800-226-1356 or emailing at RMDesk@nationwide.com.