Rating Elements of a Workers Compensation Policy

Ever wonder how an insurance company comes up with a workers comp premium for the employer to pay? Here’s some of the typical rating elements that determine the estimated annual premium.

  • Classification Code – Once the proper classification code is determined the manual rate for that code is used.
  • Manual Premium – A calculation developed using the estimated payroll or remuneration times the manual rate per code per 100 of payroll or remuneration.
  • Experience Rating Modification – A premium modifier applied to the rating formula the experience modification factor is determined by calculation of expected claims compared to actual claims over a 3 year period of time.
  • Merit Rating – A premium modifier, the merit rating factor may be applied for those smaller employers who may not qualify for Experience Modification.
  • Schedule Rating – A premium modifier, schedule rating may be applied by an insurance company based on certain criteria they have filed with the state. Applied strictly at the discretion of the insurance company.
  • Premium Credit – This is a credit that may be applied by a carrier at their discretion when an employer takes advantage of an insurance companies work safe programs, return to work programs, designated care provider or reviewer programs and other cost control type programs. All geared at reducing claim costs in one manner or another.
  • Premium Discount – A factor applied to off set certain allowed administrative expenses you’ll find the premium discount will increase as the premium increases.
  • Expense Constant – The expense constant is added to every premium and includes common expenses, such as policy processing, recording and audit, without regard of premium size.
  • Disease Loading – A factor that may be added to manual rate of an individual risk.
  • Increased Employers Limit of Liability – A factor added when increased employers liability limits are applied.

There are five premium types used as terms and found through out the rules of the basic manual and in the world of workers compensation. They are:

  • Manual Premium – Is the calculation of payroll times rate divided by 100 and may included supplementary disease loading and longshore and harbor workers exposure for non F classes.
  • Subject Premium – Is the manual premium plus the factor for waiver of subrogation, increased employers liability limit factor and charge and employers liability voluntary compensation flat charge.
  • Modified Premium – Is the subject plus the experience rating modification factor.
  • Standard Premium – Is the modified premium plus the addition of supplemental disease exposure, atomic energy radiation exposure, charges for non-ratable catastrophe loading, aircraft seat surcharges and any balance to minimum premium.
  • Estimated or Final Premium – Is the standard premium plus the premium discount, coal mine disease charge, expense constant and any catastrophe provisions.

These are the general terms and rating elements as used in the calculation of a standard workers compensation policy. They are used incorrectly all the time however they really do mean something and really do stand on their own. Be aware there are other types of policies that may included other rating factors not mentioned here. But as a start this should help make you aware of the generally accepted terms and how they apply.

Hope this helps you out! Thanks!