If you have employees, then I don’t need to tell you that workers’ compensation can be a nightmare if not properly managed. If you don’t have employees, please trust me: If not properly managed, workers’ compensation can be a nightmare.
Maybe the term nightmare is a little strong, but certainly a headache, and maybe even a pain in the . . . you know where I’m going. The reason workers’ compensation can be such a difficult insurance coverage to manage is that the premiums can be very dynamic.
Workers’ compensation premiums are determined through an equation based on the amount of payroll per job function within your business. Each job function is assigned a class code rate per $100 of payroll. These rates are set by the state in most states (there are also statutory states where only state-run funds can write workers’ compensation policies).
Each insurance carrier will write workers’ comp insurance through several different underwriting companies. Each underwriting company is given a different multiplier, often ranging from 0.97 to 1.50. The underwriting company chosen is based on the industry of the business and the specific insurance carrier’s appetite for that particular industry. Finally, the insurance carrier will apply to each individual business a modification factor, or “mod factor,” based on that business’s unique loss history.
Got all that? Don’t sweat it if you’re confused. Here’s what you actually need to know:
Problem #1: Your premiums are based on estimated payroll that is audited on a regular basis by either your insurance carrier or your state workers’ compensation fund.
- It is of the utmost importance that your payroll figures are as accurate as possible, as this is the basis for your premium.
- If you short your payroll estimates at the beginning of a policy term, you will have to pay the premium shortfall at audit time. In most states, if you don’t pay the balance owed after an audit within 60 days your business gets a Stop Work order. Not good!
Solution: Contact your insurance professional for a “pay-as-you-go” solution run through a payroll service or the insurance carrier. This drastically reduces the chance of shorting your payroll, as figures are updated on a weekly or monthly basis.
Problem #2: Because carriers use different underwriting companies, rates can vary significantly from carrier to carrier even though your job class code rate is set by the state workers’ compensation fund.
- Every insurance carrier has a unique appetite for certain types of business. Find a carrier that is looking to write business in your industry and you will most likely find the most competitive rate.
Solution: Work with an insurance professional who specializes in or at least has experience in your particular industry of business. When it comes to workers’ comp ,an intimate knowledge of the available markets can mean dollars in your pocket.
Problem #3: Your loss experience can play a major role in the premiums you pay. Mod factors can range from 0.80 to 1.50 or more depending on how good or bad your loss experience has been.
- This means that you need to look at risk management as more than just a sexy job title. Take the time to implement procedures in your business that limit exposure to employee injury.
Solution: Encourage healthy living. In general, healthy, fit employees are less likely to get injured. Additionally, do not set yourself up for failure. Try to assign employees to tasks that they can physically handle. Always provide training and continually update employees on the latest safety procedures. A little bit of preparation can mean serious savings when it comes to your mod factor.
Get Professional Help
Are you feeling a little bit better about workers’ compensation now? No? Listen, accidents happen–that’s what workers’ compensation insurance is for. But there is hope for your budgetary concerns. Use the advice I suggested above and contact your insurance professional.
Trust me, if you tell your insurance professional you’re willing to implement risk management practices, he or she will bend over backward to help you.
Good luck and stay safe.