Okay, that’s a pretty broad headline, so I’m going to break down some of the major elements of how workers’ compensation rates work in New York so you have a better idea of how it works and what’s critically important for you to know when making a decision on buying insurance.
I’m not sure I’ll hit on EVERYTHING you need to know about workers comp rates in NY, but I’ll try my best!
First, workers’ compensation is mandatory for any company with employees, you can see our blog post here on that subject. There are a few exceptions to this rule but most forms of employment are covered by the workers’ comp law. The big “workaround” that some employers believe is legit is to hire workers as 1099 independent contractors, but in many cases, this is not legitimate and can lead to penalties from the workers’ compensation board see here for more info on non-compliance penalties.
There are three major rating elements to workers’ compensation that are important to know about, especially when your premiums grow over $50,000 a year.
Loss Cost Rates
The first is rates, which in NY are broken into two parts. The first part is the “loss cost” which is often referred to as the base rate. For every classification code, there is a specific loss cost rate promulgated or developed by the NY Compensation Rating Board and every October 1st these rates are amended to reflect the actuarial results aggregated over a span of several years. If a class code, say 8810 for Clerical Office Workers has had a trend of claims that are more frequent or severe over the past several years the Board may amend the loss cost on the October 1st filing upward to assure that it is sufficient to cover future claim trends.
Loss Cost Multipliers
The loss cost rates are fixed by the State for all insurers to use, but each insurer will modify that loss cost or base rate by a multiplier known as the Loss Cost Multiplier or LCM, and this is where it gets a bit tricky. Just about every insurer doing business in NY will file with the State Department of Financial Services a set of Loss Cost Multipliers for each underwriting company they have. As an example, The Travelers Insurance Company has 17 underwriting companies doing business in New York for workers compensation, and each of those underwriting companies has its own LCM. At the moment they range from a high of 1.446 to a low of 1.052, this gives The Travelers a lot of flexibility to price a policy based on the account’s underwriting characteristics. Many other insurers have similar ranges of LCMs. A firm with a history of low claims activity and in a low hazard industry and other positive underwriting attributes may score a very low LCM resulting in a very competitive final rate; whereas a firm with many claims in a high hazard industry will likely get a high LCM and a resulting higher final rate and higher premium. In fact, if a firm in a high hazard business has very poor loss experience it may not receive any offer of coverage from a company like The Travelers, The Hartford, CNA or others at all.
So, the loss cost rate for Clerical of .13 is multiplied by the LCM 1.25 as an example to get your final rate, which is then multiplied by the payroll for that class. Since the rates are per hundred of payroll you divide the total sum by 100 to get your cost per classification.
The Experience Rating Modifier or Mod
The next most important part of the workers’ comp policy in NY is the experience rating modifier – often called the mod. The mod is also promulgated by the NY workers’ compensation insurance rating board and is specific for each employer with a standard premium of $3,500 or greater. If your premium is below $3,500 you do not get a modifier. If your company has locations outside of New York, your mod may be promulgated by the NCCI. While the mod is not technically workers’ compensation rates, it is part of the rate structure.
The experience rating modifier is based on two elements provided by a client’s insurer: Payrolls and claim costs for three of the past four years. With your payroll and claims data, the Board runs that information through a complex formula to arrive at a modifier. Without getting too deep in the weeds, it’s important to know that your company is “competing” against the historical loss experience of similar firms. If you’re a plumber your actual loss experience is being compared to the historical loss experience of all other plumbers in NY over a long period of time known as the “expected loss rate”. If your losses within the rating period are better than the expected loss rate you will likely earn a “credit modifier” or less than 1.00. If your losses history is worse than the expected rate, you will earn a “debit modifier” or greater than 1.00. A modifier of 1.00 is called a “Unity Mod” which is usually the modifier used for new firms with no prior experience.
The modifier is used in a multiplier fashion at the end of the rating process. As an example, let’s take two similar companies in the same industry with the same payrolls that have the same “standard premium” (the sum of each class code’s rate times payroll) of $100,000. Company A has had several claims in their three-year experience rating period and a couple of large claims as well. Their modifier is 1.55 which results in a final premium of $155,000. Company B has an aggressive risk control program that has produced very few claims in the experience rating period and no large claims which earns them an experience rating modifier of .75 and a final premium of $75,000. This is a bit over-simplified for example’s sake but it proves a point. There is an $80,000 spread between Company A’s premium and Company B’s premium all due to the experience rating modifier. In real life Company B would probably be eligible for a more competitive rating plan or lower LCM mentioned above which would only widen the gap between the two firms.
The point is that your claims experience has a dramatic effect on the price you pay for workers’ compensation. The larger your company, the more dramatic the difference can be. In fact, in some industries like construction, a high modifier above 1.15 as an example may lock you out of some bidding on some projects altogether!
Here’s the bottom line, there are a lot of underwriting factors that go into the final premiums any company in New York will pay for workers’ compensation, but the biggest factor is your claim experience. That’s why risk control to prevent claims from occurring and claims management to help get claims settled to their lowest possible value are two critical elements of workers’ compensation – especially for larger firms! If your broker is not working with you to help you in these two areas, you may be underserved and need to evaluate your brokerage relationship. Remember, it’s not the price you pay today that’s important, it’s the price you will pay down the road if you’re not managing risk or controlling claims.
Think you may have outgrown your broker? Want to discuss what we may be able to do for you? As an expert in workers’ compensation, risk management, and safety, we have the tools, resources, and knowledge to help New York companies like yours get control of workers’ compensation costs. To learn more, please contact us. Thanks!