Understanding Workers' Compensation
A surge in the cost average employer’s pay to provide Workers’ compensation Insurance has small business owners scrambling for answers. In order to understand the record increases I premiums, business owners must first understand how workers’ compensation insurance rates are set.
Typically, specialized technicians known as actuaries set insurance rates. These “experts” are employed by an advisory organization, such as the NCCI, as licensed statistical agents. Thus, the carriers themselves do not set the rates.
In order to calculate a “manual rating”, the employees of an insured business are grouped according to their job classification; manufacturer workers in one group, construction workers in another and clerical workers in still another. There are more than 600 separate “classifications” or “codes”. Actuaries estimate the losses that these groups are expected to have and then calculate an average cost factor for each group. This helps ensure that the businesses that use workers’ compensation insurance the most are also the businesses that pay the most.
An individual company’s premiums are also affected by that company’s “experience modification factor” or “e-mod”. In order to calculate an experience rating, the actuary uses the employer’s past “experience” (or past losses) to predict what future losses might be. When your company has less than average losses, your business receives a “credit”. When your losses are higher than normal, you assume a “debit”. These credits or debits are factored in to establish a premium rate that most closely reflects your business’s Work Comp claims history. Insurers use this “experience rating” because it helps tailor the cost predictions to each individual business. It also provides incentive for businesses to work on loss reduction.
So What Caused Rates to Increase?
Workers’ Compensation is a pre-funded system. Claims for the past three years determine the Premium Rates for the current year. An increase is Reinsurance Rates and lack of competition compound the problem.