Classification codes are the back bone of all things having to do with workers compensation insurance! Class codes are the starting place. They are often the single largest determining factor of the premium an employer will pay for their work comp coverage. They are the basis for almost all statistical data collection by various rating bureaus, collected data which refined will ultimately lead to the development of loss costs used by insurance carriers which in turn are the basis for rates they will charge employers on their policy. To say workers compensation classification codes are simple, well that would just about be the single most inaccurate thing you could say when talking about the world of workers compensation. Classification codes are so important that without them the entire workers compensation system would not exist!
I know, maybe I’m putting just a little to much emphasis on the entire workers compensation classification system. But when you consider the so called life cycle of a single classification code you’ll find it is responsible for multiple rating factors used in a variety of ways, all of which have some impact on the premium an employer pays. Here’s a few of those to consider:
- Development of Loss Costs – Loss costs, as mentioned above, are statistically developed factors for each classification code upon which every insurance company will build it’s specific rate for any specific code in question. It happens like this. When a claim, or loss, for an injured worker is reported to workers compensation insurance company that company will in turn report the loss data, which will include all costs associated with the injured employees claim, to the rating bureau in question. The insurance company will also report all payroll for all employers they insure within the subject state who fall within the classification code in question. The rating bureau will collect all loss data for that specific classification code as reported within each state. Once the loss data is refined, the rating bureau will determine, for each and every year, the specific “loss costs” for each and every classification code. The loss cost for any specific code is then that dollar amount of losses compared to payroll data collected for that specific class code which in turn determines the break even point of all claims reported within the subject state for the specific classification code. The loss costs are then published by classification code by state and provided to workers compensation insurance carriers.
- Development of Rates – Once the loss cost associate with any specific class code is published by the rating bureau the insurance company will take that number and add it’s own company expenses and proposed profit. This is a very simple description of how an insurance company comes up with the rate it will charge for any specific class code. To re-cap, the insurance company will add to the published loss cost it’s own calculated expenses and profit that it would like to make. The final number will then be the rate that insurance company will charge for that code. These rates are always expressed as a rate per $100 of rating remuneration, a special word that when defined you’ll find includes payroll, and are used in the calculation of an employers workers compensation premium.
- Development of Experience Modification Rate – For those of you who are in the insurance business or who have had experience working with the EMR or Experience Modification Rate, you will know the importance the classification code plays in regards its influence on this critical policy premium rating factor. For others, not so much, so let’s shed some light. Every workers compensation classification code carries with it several associated rating factors used in the EMR calculation. One of those factors is the ELR or Expected Loss Rate. When used in the EMR calculation the ELR sets the expected losses for that specific class code. In an extremely simple understanding of the EMR calculation it’s the expected losses for a given employer compared to the actual losses that result in the calculated EMR used on an employers policy.
I may have strayed a bit from the topic but I want you to understand that the classification code used on any employers policy is not only about the premium the employer may pay but a cornerstone of the entire workers compensation system. And getting a classification code right on an employers policy is where begins.
What is the primary reason an employer will disagree with a classification code being used on their policy? The answer has to be premium.
Employers who have a limited understanding of the workers compensation classification system will often look at the class code system as a means of paying lower or higher premium. They will often believe that lower rated class codes are the correct codes for their business. This will be fueled on by unfavorable audit results. Often the first time an employer may become aware of a classification code problem on their policy is after the payroll audit is completed and the insurance company sends the employer an additional premium audit statement. It’s at this point that most employers will begin their research into the class codes used on their policy.
Don’t get me wrong! Workers compensation classification code problems occur on a regular basis! Blame it on the complexity of the code system or an improper interpretation and application of a code to any given employers operations. These misclassifications happen frequently. (Be sure to visit our website to learn more!) But when they do, there’s a common routine that most employers will go through.
Here’s a few understandable reactions an employer will experience:
- There must be a mistake! – It’s only normal to think that when a change occurs in codes used on an employers policy, for seemingly no reason at all, that someone must have made a mistake. And yes honest mistakes do happen. But more commonly the mistake in classification of an employers business was made at a much earlier time and that mistake was simply carried forward for several years until it is finally discovered and corrected.
- The auditor did not understand our business! – Auditors do a pretty good job of getting the facts straight about a business operation. I’ve read so many audits that you can usually tell in the first few lines whether the auditor took the time to gain a proper understanding of an employers business operations.
- I’ve read the classification code descriptions and that’s not what we do! – And here’s where we get to the title of this post! Somewhere along the process someone, maybe the insured employers insurance agent, has provided the employer with a description of the code or codes in question. This is where the employer reads the description and, depending on the clarity of the description, may agree or believes that there must be a better (lower rate) code for their business. And here’s where we must point out that simply reading a class code description may not be understanding how the code is to be applied.
- I want to dispute the codes on my policy! – First question we ask when we hear this is “why?” Just because you believe a code is incorrect doesn’t make it so! Remember the entire code system is complicated. What you see may not be what you get! Sorry, that’s just my way of saying that sometimes an employer will not know the back story for a specific code in question. They may not know how that code is to be applied. And again, that’s not to say that code problems don’t happen!
- I’m not going to pay that audit bill until it’s fixed! – Sounds like a good idea but in reality it’s the insured employers responsibility to pay the undisputed amount of the premium bill. It’s also their responsibility to point out the problem with the audit or codes used and calculate the actual amount they owe. Nothing new there! However I’m sure that most employers are not aware it works this way.
We are often asked to review an employers classification codes. Usually that happens after they’ve received some kind of adverse audit billing from their insurance company. And that’s often caused by some sort of change in the classification codes or shift of rating payroll used on their policy. These things happen. And for the insured employer, depending on the amount of dollars at risk, can be shocking and, if drastic enough, devastating to the existence of their business.
It is very common that when facing extreme high audit bills that are caused by a reclassification of employees into higher rated codes the employer will seek out help. In our experience, that’s a wise thing to do!
Hope this helps you out!
Thanks for reading!