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| Safety & Workers' Compensation |
| Understanding How Workers' Compensation Works Might Help You Cut Expenses |
A predicted 25% surge in the cost an average employer will pay to provide Workers’ Compensation Insurance to his or her employees has small business owners scrambling for answers. In order to understand the record increases in premiums, business owners must first understand how workers’ comp. insurance rates are set. A helpful tutorial hosted on the National Council on Compensation Insurance (NCCI) web site will help clarify most questions (go to www.ncci.com and click on “NCCI Learning Center”).
Typically, insurance rates are set by specialized technicians known as actuaries, who are employed by an advisory organization such as the NCCI, a licensed statistical agent. The rates are not set by the carriers themselves.
Manual Rating
In order to calculate a “manual rating,” insured businesses are grouped according to their business classification: furniture manufacturers in one group, construction workers in another, and clerical workers in still another. There are more than 600 separate classifications. The actuary estimates the losses that the group is expected to have, then calculates an average cost for the entire group. This helps assure that the businesses who use workers compensation insurance the most frequently are also the businesses that pay the most for it.
Experience Modification
Once a manual rating is established, an individual company’s premiums are also affected by that company’s “experience modification” or “e-mod.” In order to calculate an experience rating, the actuary uses the employers past “experience” (or past losses) to predict what future losses might be. When your company has fewer 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 safety history. Insurers use “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 My Rates to Increase?
Workers’ Compensation is a prefunded system, meaning that ratemakers had to decide during the last year how much to charge for claims that were covered during the upcoming calendar year. Claims during the past year exceeded the amount of premiums collected, and carriers are making up for the loss by increasing next year’s premiums. An increase in reinsurance rates for the Workers’ Comp. carriers themselves has compounded the problem. Analysts surmise that “lack of competition” has also influenced the spike in prices.
How am I going to stay in business if this keeps up?
As a business owner, you are not without recourse. Maggie Karpuk, an associate with NCCI, suggests that the most important thing you can do is to get in touch with your insurance provider’s “loss control” specialists. The mechanism for controlling worker’s compensation costs depends on cooperation between the agent, the carrier and the insured.
Source: Maggie Karpuk, NCCI
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