WORKERS’ COMPENSATION 101
Workers’ Compensation
101
The Rates Are Not The Rates
H
ow many times have you
heard someone say “Workers’
compensation rates are the
rates” and you can’t change
the pricing? Well, fortunately
that is not accurate and there are a variety
of ways for you to lower your workers’
compensation premiums.
Let’s first talk about how the insurance
companies develop their pricing models
that determine how much money you have
to pull out of your checking account. The
first step is to take your estimated annual
payroll and break it down by class code.
After this is accomplished, you take the set
rates published by the state and multiply
it by your payroll (divided by 100) for that
class. The set rates are based per $100 of
payroll. The next step in calculating your
manual premium is taking this number
[(Payroll/100) x Rate] and multiplying it by
your experience modification, also known as
your experience mod.
A company’s experience mod calculation is
a very complex formula that incorporates
a number of different factors. The primary
factors are taking the losses from the three
prior years (excluding the most recent
year) and the corresponding premiums
developed. Like most insurance polices, this
is your basic loss ratio. The calculation will
then take into account the payroll dollars
for your company and benchmark them
against the industry standards for that
class code, the actual losses versus expected
losses, frequency versus severity, and a few
additional factors. Each one bears a certain
weight on the overall calculation of the final
experience mod.
An experience mod of 1.0 is considered
industry average. Anything above or below
a mod of 1.0 is a debit/credit that directly
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affects your premium amount. Let’s
suppose that you are an ice manufacturer
with $1,000,000 in payroll in the class
code of 2150 (manufacturing of ice) and
have an experience mod of 1.2. In 2017,
the published rate in New Jersey for class
code 2150 is $10.19 per $100 of payroll.
When you divide your payroll by 100 and
multiply the result by the published rate and
multiply again by the experience mod, you
will discover that your “manual rate” comes
out to ($1,000,000/100) x $10.19 (rate) x 1.2
(experience mod) = $122,280. The manual
rate excludes any forms of debit/credits and
any taxes on the policy.
If your company were proactively managing
its workers’ compensation claims and had
an experience mod of 1.0, you would only
be paying $101,900 in manual premiums
[(1,000,000/100) x 10.19 x 1.0]. If your
management of these factors and your
claims experience is less than the industry
average, you can earn a credit modification
of up to 40 percent which will reduce
your manual rates. A credit modification
(a factor less than 1.0) means that your
company would be paying up to 40% less
than a similar competitor with a higher
modification, allowing you to price your
products more competitively and gain an
advantage over similar companies.
In addition to proactively managing your
losses through various techniques such as
return-to-work programs and formalized
safety programs, you can achieve lower
premiums by having your account properly
marketed to various insurance carriers. In
the great state of New Jersey, carriers are
able to take the manual premium and add
(debits) or subtract (credits) up to 25% on top
of your manual rates.
Some workers’ compensation insurers are
very hesitant to offer credits to a policy, even
when they are warranted. When marketing
your account, not only does JGS Insurance
have the possibility of finding a company
willing to offer you a more competitive price
but also one that may be willing to offer
you a dividend. With a dividend on your
workers’ compensation program, you have
the opportunity to earn back a portion of
your premium based on your actual losses.
The few carriers in the state who offer this
solution will provide you with a dividend
table, and depending on your loss ratio (total
incurred losses/total premium), the table
will show what percentage of your total
premium you can earn back.
So while “The rates may be the rates,”
not all insurance companies workers’
compensation programs are the same. It is
essential that you become proactive in the
management of your workers’ compensation
exposures, claims, and risk management so
that you can best