The cost of worker’s comp is driven by several factors. The two biggest factors are the business you’re in and your payrolls. We’ll discuss this and other rating factors below.
To start with, every worker’s compensation policy is based on categorizing your employees into classification codes. Class codes are a standardized description of job functions with a corresponding number to each classification. For example, Clerical Office Workers are assigned a code 8810 and this number is standardized in every state’s workers compensation rating manual.
Business owners and insurance agents often get confused when it comes to classifying employees into the worker’s comp class codes. What’s important to understand is that it is the operation of the business that predominately governs what code will be used rather than the job function of the worker.
As an example, let’s take a company that manufactures plastics. There are several types of jobs inside a plastic manufacturer’s business. There will be workers who are directly responsible for the manufacture of plastic goods, there are maintenance workers who sweep up, there are shipping clerks, there may be yard employees, there may be truck drivers, there may be a machine shop on premises with those workers, and there are clerical, sales and executives. How do you classify all these operations?
While there are different rules for different business operations, generally speaking, all employees will be classified under the plastics manufacturing code, unless there is a physical separation of workspaces between the duties performed. In this example, there likely is an office where the clerical workers are physically located, so they can be classed under the clerical code of 8810. The same may be true for outside salespeople 8742 and executive officers 8809. The exception to the executive code is that if the executives spend any amount of time in the plastics shop/manufacturing floor, they can and often will be classed in the plastics code.
This is often a bone of contention and can occur during the annual payroll audit of the policy. Some insurers will look the other way and permit the use of the 8809 code for the payroll, others will stand hard on the rule and not deviate.
Now, what about all the other various workers? They will all (in most cases) go into what is known as the governing class, in this example, plastics manufacturing 4452 for plastic products manufacturing. It doesn’t matter if a worker is working at a molding machine, working on the shipping dock or sweeping floors, this is the code that will apply.
There are always exceptions to the rule, and in this example, I mentioned that this plant has a machine shop. If the machine shop is in a separate and distinct area of the plant, these workers may be classified under machine shop employees or code 3632.
This example may be a bit long, but I use it to explain the complexity of the workers’ compensation system. The biggest point I want to make here is that the insured and the broker don’t get to decide which employees go into which code, or which codes are used on a policy. That is ultimately up to the New York Workers Compensation Insurance Rating Board, or the Board of your state, or the NCCI which governs 34 state’s worker’s comp programs. Your insurer will audit your policy at the conclusion of a policy year and if your codes and payrolls do not conform with the Board’s rules, they will place payroll in the correct codes as per the Board’s rules. This often can be an area of dispute and is a subject for another article!
What I often see are two conflicting goals.
The goal of the insurer and the Board is to follow the rules and produce a policy premium that is consistent with the rating methodology of the Board and supports its actuarial goal.
The business owner’s goal is to produce a policy that has the lowest cost. This is understandable because worker’s comp can be expensive.
How do you resolve these two different goals?
It’s not always easy, but many insurers are willing to make reasonable accommodations, such as not placing executive officers in the governing class code, but this will depend largely on how well your company is managing and controlling risk, and how cooperative you are in other areas of your insurance relationship.
For example, if you are not prepared for a physical audit and don’t have all the documents ready in summary fashion for the auditor, the auditor will often take this opportunity to “stick it” to the insured. If your firm as frequent claims and doesn’t do a great job managing risk, the underwriter will not allow exceptions to rules because they feel they need all the premium they can squeeze from you to make your policy profitable.
The bottom line is that to get the best results, you need to play ball and have a broker who can help educate you on what is permissible and feasible, as well as help you manage risk and put your best foot forward. This is one of our strongest skills and we’ve worked with dozens of clients to get them on the right track when it comes to worker’s compensation.
Now back to the original question – how much does worker’s compensation cost?
In addition to the class codes that will be used on your policy and the volume of payroll in each of those classes, here are some of the other factors which determine the cost of your coverage:
The insurer and the underwriting company they will place your policy in. We’ve written an article on how each insurer in New York has multiple “underwriting companies” that all have different rating factors which you can read here.
Your loss experience, your claims management process, and your ability to manage worker injury risk. These all roll up into one of the biggest influences on the rates you’ll pay. The better and more aggressive you are here, the better you’ll perform. This is the “trifecta” of insurance underwriting and if you’re missing one element of the three you won’t score the perfect rate.
Your experience rating modifier. This is a multiplier that is applied to the bottom line premium and is a factor that is based on your specific claims for three of the past four years. We’ve written more about that HERE.
When you roll that all together you will see what the marketplace’s response is for the price you’ll pay.
Want to learn more? Curious if you’re overpaying for your worker’s compensation? Think you may have outgrown your broker who isn’t responsive or providing additional services to you? Why not click below to go to our response page, fill in the page and let’s set up some time to chat. If we think there’s an opportunity to help you improve your situation we’ll tell you. We’ll also tell you if we think you’re being well served and paying a competitive premium.
The bottom line is that you’ll not know unless you speak to someone who understands the complex world of New York Workers Compensation Insurance.