The final cost for a workers compensation policy is not determined until the final audit is complete! That’s right, these policies are not like most other insurance policies where the money you pay at the beginning of the policy is the final premium you pay.
For example when you buy a personal auto insurance policy you are quoted a price based on the type and use of the vehicle, coverage and limits requested, driving records, credit scoring and the garaging territory of the vehicle. You complete the application, pay the premium and the policy is issued. Unless, during the policy period, you make some kind of change, like getting a new or different vehicle, the premium is what you paid at the beginning of the policy.
A workers compensation insurance policy is however what’s known as an “auditable” policy. Simply stated the final premium is determined at the end of the policy and based on the actual rating exposure incurred during the policy period. The rating exposure for a workers compensation policy is remuneration which, in it’s basic form, equates to “rating payroll.”
So here’s the simple formula for caclulating premium for a basic workers compensation policy:
Rate x “Rating Payroll” / 100 = Premium
When an employer works with an agent to buy a workers comp policy the agent will need certain information from the employer. That information will typically include:
- A description of the business and what they do;
- A description of the products the business produces;
- A description of the scope of work performed by the employees.
This information should be used to develop a basic classification code for the business which in turn will provide the agent with the rate to be used in the deposit premium calculation.
The agent will then need to have:
- A projection of the rating payroll (remuneration) by classification for the policy period (twelve months.)
This payroll or remuneration information is known as the rating exposure and will be used in the deposit premium calculation.
For our example let’s assume:
- The Rate = $17
- The Projected Rating Payroll (Remuneration) = $147,000
Our simplified rating formula is then:
$17 x $147,000 / 100 = $24,990 Deposit Premium
The deposit premium is then what the employer pays at the beginning of the policy period as based on the assumptions made during the rating process.
Once the policy has ended the insurance company will then perform an “audit” to determine the actual rating exposure that occurred during the policy period. Once that is complete an audit adjustment will be made to the premium. If the employer had less rating exposure a return of premium will occur. If the employer had more rating exposure then an additional premium payment will be requested.
For our example lets assume the audit was competed and the actual rating exposure turned out to be $163,000. Here’s how the audit adjustment would be computed:
- $17 x $163,000 / 100 = $27,710 Audited Premium
- $27,710 (Audited Premium) – $24,990 (Deposit Premium) = $2,720 (Additional Premium Owed)
Yes, there are many other items that go into the rating process and I know this is the most basic example of how a deposit premium – audit premium situation works. But for many employers out there deposit premium development and audit can become a confusing hodge podge of numbers!
Here’s a few pointers for employers:
- Remember to work with your insurance agent!
- Learn how these policies work!
- Ask questions!
- If you have a problem and can’t find help look for a Workers Compensation Consultant!
I hope this helps you out! Thanks!