How are Workers Compensation Premiums Calculated?
If you’re a business owner or about to become a business owner as a startup, you may be wondering how workers compensation premiums are calculated. In this article/video I’m going to give you some of the basics around workers compensation and speak specifically about New York State, although most of the rules and comments I have here are applicable country-wide.
In New York and almost all other states, workers compensation insurance is required when you have employees. There are some exceptions to that rule, but if you have employees other than company owners you need workers comp in NY. I have more about these rules which can be found here
What is Workers Compensation?
Workers Compensation or workers comp insurance is purchased by employers to protect a company’s workers from on-the-job injuries. The purpose of workers comp is to pay all medical bills, rehab costs, prescriptions, and hospital charges incurred when a worker suffers a work-related injury or illness.
Workers comp will also pay for a portion of the lost wages an injured worker may suffer due to their injury requiring time away from the job to recover or rehabilitate.
For most small and medium-sized employers, the workers compensation policy they will purchase is known as a Guaranteed Cost policy, which is a bit of a misnomer. What Guaranteed Cost means is that the rates are fixed in the policy, but the cost can go up if the payroll goes up. I’ll cover workers compensation audits in a moment.
The point here is that in most cases the employer does not assume or share in any risk in the policy other than a small deductible in some cases. The other form of workers compensation that larger employers may consider who pay over $200,000 a year for is a large deductible plan.
For larger employers who want to reduce their upfront costs and are willing to assume some risk, a large deductible plan may make sense to look at, but again, this is for larger employers with premiums over $200,000 and a good track record on claims.
How are workers compensation premiums calculated?
The fundamental starting point in workers compensation premium calculation starts with identifying the proper classification codes to be used in your policy. I’ll dive into class codes in a moment.
Once you have the class codes, you’ll be able to then find the proper rates for those codes in the workers compensation manual. In New York, those rates are known as Loss Costs and are the base rates to start with.
From there, the Loss Costs are multiplied by your insurance company’s specific Loss Cost Multiplier, and this is where it gets a bit tricky. Some large insurers may have up to 8 to 10 Loss Cost Multipliers (LCM) or more filed with New York State. Those LCMS can range from say 1.025 to 1.575 and an insurance company will apply different LCMs to reflect the risk of the insured’s particular circumstances such as how risky the business is, their specific loss history, and more.
The point is that you’re not going to know what LCM any insurance company is going to use, so this will throw a wrench into trying to calculate your own workers comp premium.
So the next step is to multiply the base rate or Loss Cost times the Loss Cost Multiplier times the payroll for each class code established in step one.
The next biggest rating factor is your Experience Rating Modifier which is often called an ERM, your x-mod, the mod, or the modifier. Whatever it is called, this rating modifier is specifically developed for each employer in New York by the New York Workers Compensation Insurance Rating Board often called the NY CIRB. That modifier is based on 3 of the last four years of payroll and claims which is run through a complex formula to arrive at a number that can be expressed as a credit or a debit.
Employers who perform better in that formula than the average or expected rate earn a credit modifier and employers with experience which is worse than expected earn a debit modifier. Since that factor is a multiplier in the policy you’ll want to take every effort to have a safe work environment and reduce the number of claims you have.
There is a premium threshold of $5,000 to be eligible for an experience rating modifier.
Lastly, there are other rating factors applied to the premium development which include premium discounts, scheduled credits or debits, expense constant, terrorism and catastrophe charges, and in some states other charges, taxes, and fees.
Workers Compensation Class Codes
As mentioned earlier, the classification codes used in your policy are determined by the overall function or occupation of your business, not necessarily the function of each employee. In many work environments, you will see a workers comp policy have multiple classification codes. As an example, a Food Manufacturer in New York uses a class code of 6504 which all the payroll for the workers doing food manufacturing will be placed. But office workers in that same manufacturing plant would be placed in either the clerical office workers code of 8810 or executive officer code of 8809. Clerical and executive codes of course carry a lower rate than food manufacturing due to the nature of the risk they are exposed to.
The codes to be used in your policy are first established by your insurance broker and the insurance company. Which can leave the door open to misclassifications and the potential to overcharges down the road. But you can’t just change codes without the approval of the Comp Board in NY, and the same is true in many other states.
How to Buy Workers Compensation:
Finally, let’s talk about the best way to purchase or buy workers compensation insurance.
As I just described there are a lot of moving parts to workers comp. You can try and do this on your own or go directly to an insurer that sells directly online to customers, but I don’t recommend that for two reasons.
The first is that going direct may cut out the middleman so to speak and you reap the savings. But it also puts you in the middle of finding the best deal, and what may seem like the best deal today may not be down the road if you make the wrong assumptions or tell that direct insurance company the wrong things at the inception of your policy.
The second reason is that buying any type of business insurance, including workers comp is more than just buying a policy and sticking it in a drawer. There are issues like handling claims, asking questions, getting advice, getting risk control services, figuring out if your experience mod is correct or not, and many other issues relative to workers comp.
If you do it yourself and buy online directly, are you getting these advocacy services? Are you doing it correctly? Is this really the lowest cost over the long term?
Workers comp can be complicated and costly. This is why I think you need an expert advocate and why buying directly online doesn’t make a lot of sense. Will using an expert broker cost you more? Maybe, maybe not, but an expert broker adds value to this purchase and can help reduce the costs over the long term and help your business run smoother and more efficiently. That same broker can canvass the marketplace for you and find savings opportunities that you might not otherwise be able to find.
Here’s the bottom line.
You can go it alone, or you can use an expert. The same is true for other professionals you likely engage in your business. You can do your own taxes, or you can hire a CPA. You can go online and research your own legal agreements and contracts or you can hire an attorney.
When it comes to workers compensation insurance, you can do it on your own or you can hire an expert. My feeling is that regardless of the size of your company you should have an expert by your side and that includes your business insurance and your workers compensation insurance.
Thanks for watching this video or reading this post, my name is Gordon Coyle and if you’re looking for help on workers compensation premium or your business insurance costs or questions, give me a call, let’s chat. No pressure, no sales gimmicks just some conversation to see if I can help you and if we might be a good fit for your business insurance needs. I work in all 50 states and love solving insurance and risk problems and issues for business owners. To get started, just click the button below.