A recent article in the Los Angeles Times was alarming to many California employers as it stated “California businesses recently learned that their workers’ compensation (WC) insurance premiums could swell this summer.” (To read the articles from Los Angeles Times, please click here.) The article explained that a state board charged with tracking WC expenses recommended a rate increase of 24% based on rising costs such as: higher medical expenses, the threat of increased payments to permanently disabled workers, and sharp increases to medical cost containment and medical legal costs. Many employers know they must pay for WC insurance but may not know how the premium is calculated and/or what they can do to keep their premiums as low as possible, which will be the focus of this article.
What exactly is workers compensation? Workers compensation is a state-mandated, “no-fault” insurance system that pays benefits to workers injured on the job to cover medical care, supplement lost wages, and to settle any permanent disability claims. In return, employers are generally entitled to immunity from civil lawsuits that employees might have as a result of their on-the-job injuries.
How are WC premiums calculated? Each occupation is generally assigned a risk classification, determined by two historical factors: the frequency of on-the-job injuries within a particular occupation and the average severity of injuries suffered. Severity is measured by the medical costs (to return a worker back to the workplace) and any payments made directly to the injured employee (in connection with benefits provided through the workers’ compensation system).
To arrive at a base rate for workers’ compensation insurance in California, each risk classification is translated into a dollar amount, which is then multiplied by 1% per $100 of the total payroll for that employee. For example, an office clerk’s compensation rate could be calculated at roughly $1.25 per every $100 that employee’s payroll may total. If the office clerk is paid $500 per week, the WC insurance premium for that employee costs an employer roughly $6.25 per week.
The base premium for your policy is then multiplied by your experience modification (ex mod) to get your actual premium. For example: If the total base premium for your entire policy is $5,000 per year and your ex mod is 1.2%, the total premium would be $5,000 multiplied by 1.2%, or $6,000.
How is the Experience Modification (ex mod) calculated? The WC ex mod is calculated based on three years of experience (annual payroll and losses), not including the most recent year. The ex mod for 2009 would be based upon loss experience, plus payroll records reflected from 2005 through 2007. The ex mod calculation is based on what has been paid and any money the insurance carrier has set aside or reserved to resolve open claims. Reserves reflect only an estimation of what a carrier believes will be paid and do not necessarily reflect the actual amount that will be paid once the claim is closed.
How can an employer reduce/limit WC premiums? There …