Not a day goes by that I don’t answer a question like this. There’s no easy answer because there are so many individual parts that make up the workers compensation premium an employer pays. So where do you start? Let’s talk about this.
A few facts:
- Most employers have no idea of how their workers compensation premium is really developed. Sure they may have been taught over the years that classification of employees and assignment of payroll into the correct rating class has something to do with it or that claims may have an impact but what about all those other factors out there?
- Most employers are only concerned with the bottom line cost. Do they really care how it got there?
- Most insurance agents and brokers are good at comparing rates and shopping for a cheaper product.
- Most employers, agents and brokers are really too busy to get into the nuts and bolts of premium development.
To answer this question I think you first have to gain an understanding of who’s asking it and why. For an employer faced with a significant increase in premium for the same coverage they had at a lessor cost last year often makes no sense. So often they jump to the conclusion that it’s the insurance company’s fault. That they just want to make more money and decided to do that by raising their prices. Sometimes they’re right, but more often it has to do with a much more complicated mixture of risk, exposure and ability to make a reasonable profit. For an insurance agent or broker increased premium costs almost always cause alarm. You see in many ways their very livelyhood is based on securing insurance clients and keeping them so anything that may upset their relationship with the client will cause concern.
Enough! So why do workers compensation premiums increase? Here’s a few general reasons:
- Loss costs have increased. Simply put, more claims have occurred and in order to pay for those claims, rates have to go up.
- Poor experience by classification code. From a specific insurance carrier perspective they may have incurred poor underwriting experience in specific classifications. For example maybe the insurance company has had a poor track record with residential carpentry class 5645 and has decided they can either raise their rate or stop writing 5645 classed business.
- Overall poor underwriting experience. Pretty much the same as above but in a much broader sense. When the insurance carrier has had an overall poor experience with their entire workers compensation book of business. Translated…raise their overall rates or stop writing workers compensation coverage.
- Anticipated additional claim costs due to judicial or legislative action. Happens in every state and much more often than you may believe. For example, the Supremes in Nebraska, have just redefined the meaning of accident and how that may apply to workers compensation claims. They broadened the definition to include on going events over time. Think this may have a negative effect on how workers compensation claims are handled in the State of Nebraska? You should.
- Changes in EMR or Experience Rating Formulas. Every once in a while changes are made to the experience rating formulas. In reality, these changes rarely have a favorable impact on an employer. Over the past several years those states contracted with NCCI have adopted changes raising the split point, a rating factor in the EMR process. Results have been mixed with an overall negative effect for those employers with a debit mod.
Here’s a few specific employer reasons for increased premium:
- Changes in classification codes. When a business changes, adds or otherwise modifies their business operation additional class codes may now apply to their policy. Be sure to keep an eye on how the business is classed.
- Reassignment of payroll. Sometimes at audit codes will be added and payroll shifted into higher rated codes. This may be correct..or not.
- Increase in payroll. Basic premium is generated by taking the rating payroll times the rate for a specific code. When the overall payroll increases premium will increase.
- Out of control EMR. When an employer loses control of claims, doesn’t respect or doesn’t understand the negative effect claims will have on their policy they lose control of their EMR. When this happens it can take an employer years to work their way back to an acceptable EMR.
- Loss of policy credits. Insurance carriers apply a variety of premium credits to an employers policy. Some are mandated by individual states for things like drug policies and safety programs. Others are at the descretion of the insurance carrier and based on things like how well management cooperates with the carrier, whether or not they have a safety program or return to work program, how safe their work environment may be and how written procedures for employee safety and work process are documented.
So I hope this helps you understand that an answer to “Why did my workers compensation premium go up?” may not be as simple as the question seems. Keep in mind, every employer is different, every situation carries its own specifics.
Hope this helps you out and thanks for reading!