Every day here in the office my colleagues and I answer plenty of questions our insureds have. One of the areas that we receive a lot of questions on is workers’ compensation. This blog will outline how workers’ compensation premiums are calculated.
The primary purpose of workers’ compensation is to pay for medical and loss of wages to employees that have been injured in the course of their employment. The system is a “no fault” system, which helps provide coverage for medical expenses and lost wages to injured employees regardless of negligence. Workers’ compensation varies from state to state, but has the same general underlying principles. Under the law in most states, every business that has employees must have some form of workers’ compensation insurance to cover injured employees.
The base or manual premium for workers’ compensation is calculated by classifying each employee given their scope of work. Each classification is then given a rate that is determined by the National Council on Compensation Insurance. Lower rates are applied to less risky/dangerous jobs i.e. a receptionist compared to a roofer. To arrive at the base or manual premium for workers’ compensation, the rate of each class code is multiplied per $100 of payroll for each class code.
Once the base or manual premium is figured, there are several other factors considered to arrive at the final premium. One of these is the Experience Modification Factor, or MOD for short. The MOD is a numeric figure that represents a business’ claim experience. Every business has a MOD, and these figures are used to compare companies in similar industries with similarly classified employees. Essentially, it is a report card, showing how a business is performing in regards to claims compared to similar businesses in their industry. The average business, or the “C”, is set at a 1.00. Businesses with fewer, less severe claims have a MOD of less than 1.00, and that is good. That is what all companies should aim for! The MOD is applied to either increase the total premium (i.e. MOD greater than 1.00) or decrease the total premium (i.e. MOD less than 1.00). This factor is one of the few that an employer has some control over.
There are many safety programs and loss control tools that can be put in place to decrease the frequency and severity of claims, which in turn decreases the MOD. A few examples would be having all employees in a restaurant wear non-slip shoes to prevent trips, slips, and falls; furnishing all contractor employees in a construction company with steel toed boots, hard hats, and quality gloves; and just having a clean, clutter-free machine shop in a manufacturing company can reduce the exposures to potential claims.
Other factors that will affect the final workers’ compensation premium may include: premium discounts, claims reporting discounts, return to work program discounts, and scheduled debits or credits. All of these credits and/or debits are applied to the base or manual premium to arrive at the final workers’ compensation premium.
There are plenty of people in our office who love talking workers’ compensation, as well as loss control. Please don’t ever hesitate to reach out to VAST for all your workers’ compensation questions! It really is a fascinating subject, and the more knowledge an employer has, the safer the work environment can be for all involved! And, with a safer work environment, workers’ compensation premiums can be lowered!