Workers' compensation insurance is a requirement for most businesses in the U.S. Premiums are a percentage of payroll. Premium calculation is based upon risk.
The workers' compensation calculation is a flat percentage rate per $100 of the projected payroll. The claims experience of the business and other factors modifies this percentage. Insurance companies base these mods on previous injury claims.
What happens when there are mod errors? Read on to find out.
Understanding the System
The first widely developed form of social insurance in the U.S. was workers' compensation. It provides cash benefits and medical care for employees who suffer work-related injuries or illnesses. It also provides survivor benefits to the dependents of workers who die from a work-related incident.
Every state and the District of Colombia have their own laws regarding workers' compensation benefits. Workers' compensation insurance is a requirement for most private employers, except in Texas. Employers in Texas who opt out of coverage lose their customary defenses against suits by employees.
Some employees and employers are exempt from the workers' compensation requirements. Exemptions might include state and local public employees (who may have program coverage by other means.) Also, typical exemptions are religious, nonprofit, or charitable organization employees. Some workers, such as domestic or agricultural labor are left out, too.
The premium calculation formula is simple:
Rate per $100 Payroll X Payroll amount X Experience Mod = Premium
There are two variables: the rate and the experience mod. The rate varies by industry and employee classification. The experience mod changes with the claims history of the business.
Classify Risks Correctly for the Best Rate
Insurance companies base workers' compensation rates on the type of industry and the work function of the employees. Employees in the same industry that perform similar functions have the same classification.
For example, construction companies have a different classification than computer software companies. Secretaries in both industries might perform similar duties, but have different injury risks to their jobs. Rates for each reflect occupational risk.
Some occupations are riskier than others. Diving work in the open ocean is riskier than retrieving golf balls from the country club pond. Thus, the rate for retrieval divers is higher on oil rigs than at Augusta National. To ensure the best rate, review your employees and industry for correct classifications.
Rating classifications are created by actuarial bureaus. The bureau may be the state's own agency or the National Council on Compensation Insurance (NCCI). If you find your classifications are incorrect, contact your insurance company.
Mod Errors Cost Money
The second part of the calculation is the experience modifier. This number represents a company's workers' compensation claims losses compared to an industry average. The comparison pits the number and severity of your workplace injuries against the expected number and severity of claims.
If the company has an average loss history the modifier would be 1.00.
A company with fewer than average claims losses results in a mod less than 1.00. A modifier greater than 1.00 indicates the loss history is worse than the industry average. Depending on the state law, the calculation of mods is by the NCCI or a state rating bureau.
Mod calculation depends on accurate information about claims and compensation. Mod errors do creep in, so keep good records. Pay prompt attention to the experience mod calculation provided with your premium bill. Finding mod errors is finding money!
Reduce Your Modifier for the Lowest Possible Premium
On its own, a business can't control the occupational risks of the entire industry or the rates of certain classifications. However, there are ways to lower the experience mod and reduce premiums.
A Culture of Safety
Require employee safety training. Regularly evaluate work practice for safe operations and premises. Maintain a safe workplace.
Use an outside safety evaluation to suggest changes and implement them as soon as possible. A small reduction in the experience modifier multiplies to significant savings.
Return Injured Workers to Work
An organized program to return injured employees to work keeps morale high and reduces the cost of claims. After any accidents, investigate thoroughly and make changes to prevent a repeat. Show concern and get the employee care as soon as possible.
Join In Premium Reduction Programs
There are state and industry safety improvement programs to reduce workers' compensation premiums. For example, some policies lower premiums for employers who agree to participate in a Drug-Free Workplace program. Other insurers might discount for employers who agree to computer monitoring of workers.
Become Part of a Safer Group
Some insurers recognize certain groups as safer than others. They offer discounts to these recognized groups. A group rating indicates a business has a better than average safety history. Check with your insurance representative to see if your claims history qualifies.
How To Fix Errors
Do you think your high premiums are because of some mistake? Follow these steps, then contact your insurance agent to trigger an official review.
Review Your Classifications
Many businesses and employees are improperly classified. For example, suppose your sales rep is classified as roustabout since she is employed by your drilling company. The workers' compensation rate for a laborer will be much higher than the rate for a sales worker.
Review Payroll Projections
A payroll projection for the period ahead determines your premium. If the projection is inaccurate you can overpay. Ask your insurer to adjust your payroll, especially if you experience seasonal fluctuations.
Review Your Experience Modification
Compare your claims records and outcomes with those in your insurance company's calculation. Even small mod errors can multiply into large premium increases.
Think Your Mod is Wrong?
If you think your business' assigned classifications, payroll projections or mod calculations are wrong, ask your insurance representative for a review.
We can help you find the right coverage for your needs. Contact us today!
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