Workers Comp Premium Dollars And Cents

The Typical Situation: At renewal time, you receive a Workers Comp (“WC”) renewal quote from your insurance broker and maybe a few additional quotes from other carriers.

Where You Go Wrong: You probably just pay the premium every year without considering the components that went into that price. You get a lengthy quote breakout which bares resemblance to a 1040 Tax Form, and like many insureds, you focus on the final premium. You should be asking what factors determine your final premium. Knowing how the premium is calculated will allow you and the broker to pick the right carrier and maximize on your savings!

Let me explain some basic pricing components.

Loss Cost (“LC”) = This is a base rate that is the foundation for every WC quote. The rates are typically established by the National Council on Compensation Insurance (NCCI) or by your resident state. The rate is displayed as a dollar value rate per $100 in payroll. For example, the base rate in PA for the Home Health – Non Professional Staff (0943 class code) is $3.12 per $100 in payrolls.

Loss Cost Multiplier (“LCM”) = Every WC carrier files for an LCM with a state which will serve as its multiplier (eg 1.40 or 1.78) to determine the carrier’s respective base rate. Before filing for an LCM, the carrier will conduct an extensive actuarial review of their own claims compared to performance of other competitors. They then determine an LCM that will yield profitable underwriting results. The LCM is then reported and filed with each state’s Department of Insurance. Because of the time commitment, once filed, the LCM typically remains in place for several years before an actuarial review is conducted again.

Most carriers also have several underwriting companies, with each underwriting company having its own filed LCM. For example, Travelers Insurance has about a dozen of such companies – Travelers Property Casualty Co., Travelers Indemnity Co., and United States Fire Insurance Co. are just several examples.

Experience Modification Factor = This is a factor provided by either NCCI or by the resident state. The Experience Mod Factor does not vary from carrier to carrier. This is a factor assigned to your company based on your claim history. An Experience Mod Factor of 1.00 means that your past claim experience is exactly the average of other companies in your industry and in your state. Anything less than 1.00 means your claim history is better than the average. Anything more than 1.00 means your claim history is worse than the average. This factor is then applied directly to your base rate.

Don’t have an Experience Mod factor just yet? You will. It gets assigned to insureds in business for more than 3 years and who also pay more than $10,000 in WC premium annually.

Scheduled Credits/Debits = In addition to carriers filing their LCM with the state, they also file for allowable credits and debits that they can apply to a quote. A carrier, for example, may file for a 20% credit/debit swing in any one direction. That is HUGE! For your company, having the right policies, procedures and/or controls in place will have a direct impact on whether a carrier can apply a credit or debit to your price. You and your broker should be discussing on how to maximize on your credits. For example, performing Motor Vehicle Records (“MVR”) checks annually or teaching employees how to properly dispose of syringes can have a positive impact not only on your business practices, but also on your bottom line.

Premium Discounts = This is somewhat of an arbitrary category. An underwriter may have some latitude in pricing adjustments particularly on larger premium accounts (generally over $50,000 in premium). For example, this premium can be reduced if there is some agreement in place at the franchise level for individual franchisees, or if the client has other lines of insurance with this carrier.

Other Credits/Debits = There are other components that may impact your premium. For example, increasing Employment Practices Liability limits or having a deductible will impact pricing.

Example

Class Code: 0943 Home Care Non-Professional Staff

Annual Payroll: $2,000,000

All Insurance Co. (Rate): $4.99 ($3.12 LC x 1.60 LCM)

Manual Premium $99,800

Premium Calculation

Manual Premium: $99,800

Experience Mod Factor (.90) $89,820

Schedule Credit (.85) $76,347

Premium Discount ($7,500) $68,847

Taxes and Employer Assessment (3.0%) $70,912

Total Premium $70,912

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