This post is about how claims can effect workers compensation premium. There are several factors that must be considered and few conditions that must exist but claims can have a negative impact on the cost or premium of a workers compensation policy for the insured employer.
For those employers who are experienced rated, most claims will have a direct impact because of their effect on the experience modification factor. The experience mod factor or X factor is a premium modifier that’s applied to the rating formula. A debit experience mod, anything over a 1.0, while certainly an indicator of prior claims, is made part of the formula. We’ll have more information on the experience modification factor later but just remember this for now, this factor can have a tremendous effect on premium an insured employer pays and is a direct reflection of the employers claim history.
Here’s a simple example. Lets say the 1.0 experience mod premium or unmodified premium is $40,000…but due to poor claim experience the mod factor is 1.25…multiply $40,000 x 1.25 and you have a modified premium of $50,000…a $10,000 penalty for bad claim experience! Oh…and that’s not just for one year because the claim effect lingers around for 3 years, the time a single claim, through the experience mod adjustment, can effect the premium calculation!
While the experience mod has a direct impact on premium there other things that must also be considered, here’s a few;
- For those employers who may not be experience rated, claim experience and premium adjustments may be reflected in some form of merit rating factor;
- For employers with coverage through an assigned risk plan, otherwise known as the pool, the application of an ARAP factor , Assigned Risk Adjustment Plan, may apply. This factor may be used in conjunction with the experience mod factor and is actually calculated when the experience mod factor is calculated. When applied this may cause a great increase in cost. Take the above example…after the emod is applied and the premium is now $50,000…lets say the ARAP factor is 1.20…apply that and now the employers premium is $60,000!
- Lack of ability to secure coverage in the standard market; poor claim experience may make an employer ineligible to find coverage through the standard market causing them to turn to the assigned risk plan or pool. Generally pool rates are much higher than standard market carriers as this is considered the market of last resort.
- Retrospective Rating Plans or other loss sensitive rating plans take claim costs directly into consideration and they have another direct impact on the bottom line cost.
- And these are just some of the more obvious results of claims and their effect on premium!
Yes claims can play a very big part in the cost of a workers compensation program. From a the pure cost of premium increase due to their effect they have on the rating formula factors to the costs and effect they have on loss time and injured employees. No one really gains when a workers comp claim occurs. So the importance of safety and claim prevention is paramount for any insured employer.
Can anything be done after a claim occurs to protect the interests of the insured employer? Yes. I’ve mentioned this in other blog posts and on our website. Having an outside independent claim review is the first place to start. A claim review will help identify mistakes and errors an insurance company may have made in the claim process. From the initial validity of a claim to the handling of a specific claim and reserving practices used, errors occur with some regularity and frequency. It’s those errors that lead to additional premium costs. It’s those errors that can be identified adjusted.
Hope this helps you out! Thanks!
