Workers compensation premium, what you pay, is determined by multiple factors for any individual employer. Let’s take a look at some of the prime factors driving workers comp premium increases.
What causes workers comp premium to increase? Here’s a short list, some of the issues driving premium increases:
- Rate Changes: Workers compensation rates fluctuate. One of the most frustrating things I deal with is when an insurance company makes an anouncement that they are reducing their overall workers compensation rates. Sounds great! But pause, and take a look. Most insurance companies when making rate changes increase some classification rates and decrease others. While the net overall change may show as a total reduction, many individual classifications actually take a rate increase. Example…code 8017, store, takes a 10% rate reduction while code 5645, carpentry, takes a 5% rate increase. The overall effect is a percentage decrease. When in fact code 5645 is a very common code found on many contractor policies and one that carries a much higher rate per 100 than that of 8017, store. So while the insurance company can tout a net reduction in rates on a percentage basis the fact is the carpentry code took a significant increase. Keep your eye on the details! They matter.
- Changes in Classification Codes: Classification code changes can occur for many reasons including errors in application of correct classification codes, consolidation of codes from the rate bureau or rate making authority, state adoption of different more descriptive codes, mistakes in code assignments. Whatever the reason behind a code change this action can lead to an increase rate being applied to a workers compensation policy.
- Changes in Payroll: When a business grows and incurs more payroll it’s natural to expect an increase in the cost of workers compensation premium because there is a direct relation between the amount of payroll and the premium calculation. Rate per 100 of payroll is the basic formula.
- Reassignment of Payroll: When an employees payroll is reassigned to a higher rate classification code at audit an increase in premium will occur. Whether the action of reassigning payroll is correct or a mistake on the part of the insurance company or auditor, a direct result of this action will most commonly be an increase in premium. Improper payroll assignment may also occur with the application of an ownership entity where the owner has been included or excluded from coverage. This effects all forms of ownership, corporate officers, LLC members, partners and sole proprietors.
- Changes in Business Operations: When a business changes what they do, higher premium costs may be triggered. This goes back to the classification issue. Change your operations and a different code may apply. Perhaps a code with a higher rate.
- Claims or Loss Experience: For those risks that are experience rated a direct relation exists between claims or losses incurred and the premium you pay. Reflected in the experience rating mechanism as an increased E-Mod, Experience Modification Rate or EMR, more claims will create a higher factor which will have a direct impact on your premium. Good news is that fewer claims may have a positive impact on your premium.
- Cost of Medical Services: Workers compensation is about taking care of an injured employee who suffered the injury at work. Been to the doctor or hospital lately? It’s expensive! And the costs associated with medical treatment of a workers comp claim is by far one of the most important factors driving the costs of today’s workers compensation insurance. How claims are handled, medical procedures provided and lost wages paid all play a big part in the overall cost of a workers compensation claim and are ultimately reflected in the rates.
- Of course there’s many more…
Why do premiums continue to go up? Well let’s look at this as a balancing act with many different interested parties. The employer, whose type of operations dictate codes used and payrolls assigned to those codes; the insurance company, who looks for a profit in the products they supply; the injured employee who needs proper care and replacement of lost wages while off from work; the medical community, who provides the care and services to the injured employee…all have interests in this product we call Workers Compensation and unfortunately all play a role in the increased premiums an employer pays!
Hope this helps you out!