With a topic as confusing as Workers’ Compensation can be, we decided we would do an overview and the benefits of various types of Workers’ Compensation (WC) insurance rating plans. A rating plan is simply the method or set of equations that go into the calculation of premium, and the variations are many dependent on size of company purchasing the policy, state(s) of operation, risk tolerance (willingness to gamble), claims history, and insurance carrier providing the policy.
In general all WC plans can be put into one of a few categories depending on when premium and costs will be established. Most plans can be categorized as Prospective, Retrospective, or Cash Flow Plans (Deductibles). All these plans contemplate that the premium will be comprised of the cost of claims, expenses associated with handling the claims, profit for the carrier, and taxes.
Prospective Plans – Prospective plans are the most common and usually called Guaranteed Cost (GC). This plan uses “expected” claims values that are used in conjunction with other statistical variables thrown in to a simple formula. In the simplest form a GC policy can be rated by (Payroll $ by code/$100) x rate= premium. Now, it’s called prospective because you have the covered business and the insurance carrier trying to predict what’s going to happen in the future. Everyone wonders how many claims will I have, how much will they cost, and when will they have to be paid? Insurance companies use vast resources (like historical claims/premium databases, actuaries, and outside agencies) to help them predict claims frequency and outcomes on the large scale. By doing this, insurance companies can apply what they feel are appropriate rates, discounts/credits, or penalties/debits to determine a premium appropriate with what they expect in claims.
For a business owner or WC purchaser, when claims aren’t consistent, statistically predictable, or simply too expensive, a GC plan will make the most sense. The insured on the GC WC policy does have a couple of variables to potentially work in their favor: scheduled credits, premium discount, various state credits (like safety credits and drug-free workplace credits), and the experience modifier (either NCCI or state specific) can all lower the premium for a well run, safe organization.
The variables:
- Rates – rates are the premium amounts the insurance company is charging and is a cost per $100.00 of payroll for each specific job code. Insurance companies have to apply with each state for their rates to be utilized. Some states, like Florida, have administered pricing and the state itself sets the rates.
- Scheduled credits/debits – Scheduled credits/debits are used at the underwriters’ discretion and can adjust the premium significantly. The cap and floor for these credits/debits are state specific. If you operate employees in states like FL, HI, KS, NE, NY, OR, & WI you’re out of luck because the state Insurance Departments do not allow these credits/debits. However, all other states (outside of the monopolistic ND, OH, WA, & WY) do allow these deviations and while most are capped at +/- 25%, some states, like IL, go as high as +/- 65%.
- Premium discount –a premium discount is applied on all policies, but the discount depends on the size of the premium and increases as the premium becomes larger. To qualify for the premium discount, the customer must meet a certain minimum premium size, usually $5,000. The premium discount can vary by state and by how your insurance company is filed in that state, but typical discounts are between 4 and 9%.
- State credits – discounts for things like using a qualified drug-free workplace program or having a qualified Safety program are also available, but are state specific. If you operate in AL, AR, FL, GA, MS, SC, TN, or VA, you’re in luck because the credit is NOT discretionary. If you fill out the form to prove qualification, you get the discount. These usually run between 2 and 5%. With proof of qualification, these two credits are applied at the onset of the policy. Another popular state specific credit is associated specifically to the construction industry. It is a little more tedious of a form to fill out, but the credit can be significant. It essentially says that if you pay your employees, on average, more than a minimum the state sets, then you can get a credit on the amount above the minimum. If you missed this one, you can go back and receive the credit for multiple past policies. If you’re in AK, CT, DE, FL, HI, IL, MD, MA, MN, MO, MT, NE, NJ, NM, NY, OR, PA, VA, or WI, you can apply for this credit.
- The Experience modifier –we have an entire article devoted to the Workers Compensation Experience Modifier.
Below are some of the primary benefits of purchasing a GC plan for both the customer and insurance carrier.
Customer benefits:
- All costs are know and fixed in advance of the inception of the policy
- Easy accounting for consistent premium billing
- Provides the customer with the full services of the carrier
- If voluntarily written, customer avoids the stigma and financial penalty of going to a state assigned risk pool
Carrier benefit:
- Provides premium flexibility for the above average company who do not want to be rated on actual incurred claims
- Provides avenue for additional premium on below average companies
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