Workers compensation rate and rule changes effect employers in many different ways. Lets learn what rate and rule changes are and how they have different effects on different employers.
To begin, you must have some basic understanding of what rate and rule changes are and what’s included in both subjects. Workers compensation insurance, on the surface, pretends that it’s a very simple insurance product. When in fact it is a very complicated insurance product governed by a combination of insurance policy contract language, individual state workers compensation legislation, state specific rules and individual state rating bureau developed and administered rules.
Some states like California, Massachusetts and Michigan have their own state run workers compensation rating bureau. (Use our rating bureau directory to look up a specific state.) However you’ll find that most states contract with NCCI or the National Council on Compensation Insurance as their rating bureau. NCCI’s primary role, like any other rating bureau, is to provide rate statistics and rules specific for the individual state for those insurance carriers who provide workers compensation within the state to follow. You’ll find the relationship between NCCI and the individual states who use them to be somewhat complex and maybe a little hard to understand for most folks. Maybe a better way to put this is that individual states hire NCCI to administer workers compensation within their state. Of course the state has the final say when it comes to loss costs (the basis for a class code rate) developed by the rating bureau to be used by insurance carriers and the rules to be followed by insurance carriers in administering the workers compensation product within their state. Now that we’ve got that clear as mud lets move on and talk about rate making and rate changes.
Workers compensation rate making is the process where claim data specific to an individual workers compensation classification code is gathered, categorized, analyzed and used to develop what’s known as a loss cost. The loss cost for a specific class code, is the statistically developed base rate that is provided for each classification code within a specific state. A loss cost represents the raw minimum rate that will be needed to support an equality of losses to payroll represented for an individual class code.
As a very basic level example lets suppose in your state you have a class code that represents lawn furniture manufacturing companies. We’ll say the code for this type of operation is XXXX. All insurance companies in your state who provide workers compensation insurance for employers who fall within this code report all claims they have incurred for the year to the rating bureau. They also report all payroll associated with this class code to the rating bureau. The rating bureau uses this data to develop the loss cost for code XXXX. The rating bureau then provides this loss cost to the state for approval. Once your state approves the loss cost for this code your insurance company will then use the new loss cost the rating bureau publishes in calculating their final rate. Your insurance company will then take the loss cost provided by the rating bureau and apply their individual company loss cost multiplier and further develop the loss cost to the final rate they will use for code XXXX. Then when you buy your insurance for code XXXX from the insurance company they will then use the final rate they have developed for code XXXX to create the deposit premium you pay. Keep in mind this example is not precise but more or less accurate in the general method used for rate making.
So in a nutshell, workers compensation rate changes will have a direct impact on the premium an employer pays. The employer will either pay more or less depending on their specific situation.
It’s often confusing when an insurance company sends out a notice that says something like “We Are Reducing Our Rates 4% on Average!” Sounds like good news right? Well hold on! Look a little closer. While it may be a true statement that the insurance company’s overall group of workers compensation rates has gone down you must pay attention to specific class codes. For example what if the insurance company took a 28% rate reduction in code 8742, outside sales, but took a 24% increase in code 5645, residential carpentry? Say I’m an employer with $500,000 payroll in 5645. I’d take a giant increase in the premium I pay and the insurance company would still be able to say “look at how we’ve reduced our rates!” I’m sure you get the picture.
While rate changes may have the greatest effect on an employer and the premium they pay we cannot discount the effect workers compensation rule changes may have.
Just like most organized programs of whatever kind, workers compensation insurance is governed by a set of what I’ll call “Rules of Operation.” For the most part, workers compensation insurance is a state mandated insurance coverage. It differs from all other insurance in that benefits an injured worker will receive is not up to the insurance company but is mandated by the state and outlined within state statutes.
It’s within individual state statutes where you will find not only the benefits that are paid upon injury but where you will find things like, who has to carry workers compensation, how sole proprietors, partners, LLC members and corporate or executive officers are treated within the state in question. Statute outlines whether those types of owners are included within coverage or if they can elect to be excluded or included. Statute dictates the rating payroll that is used for an owner when included within coverage. When trying to decipher state statutes you’ll find, for the most part, they are a hodgepodge of written legislation that has been developed, added to and or modified throughout it’s history for the state in question. They are not easy to read and even more so they are not that easy to find! Statutes may refer to other statutes found with the states code and they all have to be understood in order to have a general understanding of how the workers compensation insurance product works.
As I mentioned above, most states contract in some form or other with the National Council on Compensation Insurance otherwise known as NCCI to provide the written rules of operation for their individual states workers compensation system. NCCI provides their individual member states with a variety of services in regards workers compensation. As I mentioned in the above section on rates, you’ll find they provide the rules that govern all the individual players including insurance companies and employers alike. They also provide rate making services, claim payment statistical services, classification code development and implementation along with a myriad of additional services required to make the workers compensation monster operate. They over see employer and insurance company disputes ranging from classification code assignment to audit. And they provide classification inspections to help determine appropriate employer classification. Of course the individual state retains all control over the approval of rates and rules used within their state. NCCI only acts as an administrator of the system.
So workers compensation rule changes may encompass any type of operational rules. One of the rules that change almost every year is the state rating payroll that’s used when including an owner within coverage. Other rule changes that typically occur every year have to do with individual rating elements used in experience modification rate calculations. And this year in particular we saw a class code change where a specific code was developed for use with furloughed employees.
Workers compensation is not rocket science! It is, however, a system that’s governed by often hard to find individual state statutes or laws and difficult to understand rules that continue to create challenges for those of us lucky enough to work within its ever changing landscape!
Hope this helps you out!
Stay safe and thanks for reading!