Risk Exposure, Underwriting and Pricing of a Workers Compensation Policy

Anybody who has had anything to do with a workers compensation policy probably has an idea of how the premium is calculated. You may find they may even know that there’s a different rate per hundred of payroll for each class code used on a policy. In this post we’re going to go a little deeper and talk about the relationship between risk exposure, underwriting, rates and pricing of a workers compensation policy.

Coming up with workers compensation rates are in a way like cooking. You add a touch of historical loss data, a touch of profit, a dash of risk exposure cook it all up in a pot and before you know it you have a rate! Each individual classification code represents a different set of work hazards that over the years have been fine tuned into a very specific set of work duties. There is a direct correlation between risk and rate. Think about it. Certainly an office worker is exposed to less occupational hazard than a welder.

Risk exposure is just what you think it means, the exposure to risk. In workers compensation the exposure to risk means the presence of a hazard. Hazards cause accidents in which workers are injured. So work place hazards are a key starting place for developing workers compensation rates.

Identification and categorization of work place hazards has long been a goal of the workers compensation pricing system. Quantifying the chances of a worker being injured while performing their assigned work duties is a task that relies on historical and currently reported claim data. When a workers comp claim occurs that data is reported to the appropriate rating organization for use in the development of loss costs. Claim data is reported by classification code. So over the years we’ve gathered an enormous amount of claim data categorized by class code. That data is then used in the statistical process of loss cost development.   

Loss costs are produced by the appropriate rating organization for each individual class code for the individual state in question. Loss costs are the pure costs required to sustain a zero loss or gain from dollars paid for claims related to an individual class code.  

Have you ever noticed how workers compensation rates change from year to year. Some go down and some go up. While insurance company desired profit levels and market placement certainly play a role in setting a rate, its loss costs that answer the question most insurance companies ask – “What do we have to charge to break even?”

What’s all this have to do with underwriting? Simple. Think of workers compensation underwriting as being the watch dog of risk identification and proper placement.

This complicated system of data collection, identification of risk exposure, proper categorization of risk, loss cost development and ultimate rate development is based on “getting it right.” Sure there’s some wiggle room built-in but what would happen if all welders were given the same rate as the office worker? Certainly more significant injury claims occur to the welder than office worker. The loss costs for the office worker would be insufficient to support the injuries incurred and the ultimate effect would be a disruption of  the whole rate development system.

It’s the underwriting process that’s tasked to verify proper risk placement. To identify and make sure an employers workers are properly categorized. They do this by using a variety of underwriting tools including:

  • The workers compensation application – The application includes a series of questions that are designed to uncover hidden risk exposure, to bring that exposure to light and to address the proper handling of the identified exposure.
  • Inspection reports – Nothing beats an eyes on inspection of an employers operations. Facility inspections will provide the underwriter with detailed identification of work processes, worker training and physical plant and equipment exposure.
  • Loss history – A review of past losses and resulting improvements made because of those losses will give the underwriter a better idea of special hazards present.
  • Outside resources – Experience rating worksheets produced by the rating bureau will provide the underwriter with historical payroll, class code and claim data. Underwriting guides are available to help identify work place hazards. OSHA records also provide insight into work hazards.
  • Safety program – Safety program review gives the underwriter insight as to how well management has identified and managed their work place hazards.

Rate development, underwriting and pricing a workers compensation risk involves juggling many individual factors. It’s a process that only works when all the parts work as they were designed. Remember, it’s in the process of pricing a workers compensation policy that risk exposure and underwriting come together. Each part of the process has its place. Don’t get lost in the process! 

Hope this somehow helps you out! Thanks for reading!