ALL ABOUT CALCULATING WORKERS' COMPENSATION PREMIUMS
How Are Premiums Calculated?
Understanding how workers’ compensation insurance premiums are determined is very important. Many calculations and comparisons are needed in order to customize each employer’s insurance premium. These calculations and comparisons ensure employers, in low hazard industries, pay smaller premiums than do high-hazard industry employers. Employers with fewer claims and good safety records pay less in premiums than do employers with many claims and undesirable safety records.
The National Council on Compensation Insurance (NCCI) keeps statistics necessary to differentiate high and low hazard industries and high and low hazard employers within the same industry. The NCCI combines statistics of hundreds of insurance carriers in several states, including Missouri. Each insurance carrier, writing workers’ compensation policies in Missouri, keeps a claims record for each of its clients. At the end of the policy year for each client, the carrier sends the claims records to the NCCI. This pool of statistics is then used to help calculate experience modifiers, rates, and classifications.
High hazard and low hazard industries are distinguished by the classification code they are assigned and the manual rate they pay for workers’ compensation insurance. The classification code and corresponding manual rate are the first factors used to calculate an employer’s insurance premium. If an employer is assigned to a high hazard code such as roofing, trucking or logging, the employer will pay a higher manual rate that employers assigned to a restaurant, clerical or light manufacturing code. Manual rates vary widely from one (1) classification to another and are expressed as a dollar figure per $100 of payroll. It is easier to look at rates, however, as a percentage of payroll rather than per $100 of payroll. For example, $13.71 per $100 of payroll is simply 13.71% of payroll.
Each occupational classification code may either represent entirely different industries or a segment within different industries. For example, Code 2501 Clothing Manufacturing represents an entire industry, but Code 8810 Clerical Office Employees represents a segment of employees within many different industries. There are three (3) classifications considered standard exception codes--Code 8810 Clerical Office Employees, Code 8742 Outside Salespersons, Collectors, or Messengers, and Code 7380 Drivers, Chauffeurs and their Helpers. Standard exception codes can be separated from the employers’ main classification code because employees engaged in these jobs are normally not
involved in other operations.
After a specific classification and rate is assigned to an employer’s operations, their manual premium is determined by multiplying the employer’s payroll by the appropriate rate. Throughout this discussion a hypothetical employer, “ABC Trucking”, will be used to show how the entire rating system works. ABC Trucking has a $453,000 payroll and is classified as Code 7229, Trucking-Long Haul. Their manual premium would be 453,000 X 13.71% or $62,106. All employers’ worker compensation premiums are based primarily on their manual premium, adjustments are made to the manual premium that will be discussed later.
The company insurance agent or insurance carrier determines the company’s classification code from the definitions available to them from NCCI for the scope of work performed. These definitions are contained in the “Scopes of Basic Manual Classifications” manual which insurance agents use to classify their employer clients. Since many classifications are very similar, codes are sometimes difficult to determine. In these instances, an insurance agent or carrier may ask the NCCI to physically inspect a specific employer’s operations and make the final classification decision.
What Determines Manual Rates?
Two (2) factors affecting the insurance premium are the manual rate and company payroll. The third factor affecting the premium is the employer’s experience modifier. The experience modifier is one of the most important components of a company’s worker compensation premium. It is used as a multiplying factor of an individual company’s manual premium and is often the most effective tool for controlling premium cost.
An average experience modifier is expressed as 1.00 and simply means that a company has average losses and will pay 100% of their manual premium discussed earlier. A higher than average experience modifier would be any number greater than 1.00. A company with a 1.43 experience modifier will pay 143% of its manual premium. This 43% surcharge reflects the higher than average claims which the company has experienced. The experience modifier is not always 1.00 or greater, but can also be lower than 1.00. If a company has an experience modifier of .73, they will pay only 73% of their manual premium. This effectively gives the company a 27% discount, and reflects the company’s lower than average losses, claims and injuries.
The following chart compares different experience modifiers for ABC Trucking with varying results.