KNOW YOUR RIGHTS
WORKERS ’ COMP INSIGHTS Premium Audits
While workers ’ compensation requirements can differ between states , many policies include a routine premium audit process . Different from most other lines of commercial insurance ( e . g ., property coverage )— in which potential exposures can be identified upfront and premium expenses are final — workers ’ compensation premiums paid at the beginning of policy periods are provisional amounts .
In other words , these premium expenses are purely estimates based on an organization ’ s projected payroll and operations for the upcoming policy period . That being said , the purpose of a premium audit is for an insurer to evaluate an organization ’ s actual payroll and work performed at the conclusion of a policy period to determine whether the initial premium amount was appropriate .
Depending on the results of a premium audit , an organization may either owe additional expenses to their insurer or have funds returned to them . Review this guidance to learn more about premium audits , how to prepare for an audit , and next steps following an audit .
PREMIUM AUDITS EXPLAINED
To better understand premium audits , it ’ s first important to note how workers ’ compensation premiums are calculated . An organization ’ s premium is based primarily on three key elements :
1 . Employee classification rates — First , employees are assigned class codes based on the work they perform and the perceived level of risk associated with that work . These codes are tied to specific employee classification rates . The higher the rating , the riskier the employee ’ s job role is . For example , a roofer would receive a greater rating than a carpenter due to the risk of falling from height . Such rates are typically determined by the National Council on Compensation Insurance for employers with employees in multiple states . For Wisconsin - only employers , this is determined by Wisconsin Compensation Rating Bureau ( WCRB ).
2 . Payroll — Next , an organization ’ s overall payroll must be considered . In the scope of calculating workers ’ compensation premiums , for each employee classification rate , an organization pays a certain amount per every $ 100 of payroll . Keep in mind that an organization ’ s classification rates and total payroll are the two elements used to generate its manual premium . This means that the equation for an organization ’ s manual premium is [( employee classification rate ( s )) x ( payroll / 100 )]).
3 . Experience modification factor — Lastly , an organization ’ s experience modification factor — also known as the mod factor — is calculated using loss and payroll data from the last three policy years , excluding the most recently completed year . From there , the organization ’ s actual losses are compared to its expected losses by industry type . A mod factor greater than 1.0 is a debit mod , which means that an organization ’ s losses are worse than expected , — resulting in an elevated premium . A mod factor less than 1.0 is a credit mod , which means an organization ’ s losses are better than expected , — resulting in a discounted premium .
Putting these elements together , the general equation for a workers ’ compensation premium is an organization ’ s manual premium multiplied by its mod factor . However ,
29