Insurance premiums are based on several factors, including location, age, tobacco use, and plan category.
However, the rate-making process may need to recognize emerging claims issues or risk exposures fully. As a result, the rates imposed on businesses can be inconsistent and volatile.
Claims History
A state workers’ compensation fund is a quasi-government organization that provides employee insurance and protects business owners from lawsuits. In some states, these state funds are monopolistic and don’t allow businesses to purchase private workers’ comp policies. However, the rest of the United States has competitive state funds that provide alternative options to private insurance companies and compete with them for businesses’ work comp coverage.
Both state funds and private insurers use a system called NCCI to create ratings that assign risk categories to different jobs. Insurers use this information to calculate premium rates for their policies.
While NCCI is the source for many of the rating information used by insurers, some states have independent rating bureaus. This means that the information gathered by the rating bureaus may differ slightly from NCCI’s, which could result in higher rates for business owners in those states.
In addition, monopolistic state funds sometimes align with NCCI’s classification codes, so the work comp coverage they offer might be less comprehensive than what would be available from a private insurer. This can be costly for business owners, so it’s essential to consider all the factors when selecting a workers’ comp policy in a monopolistic state fund program.
Classification Code Rates
In many states, premium rates are set for individual class codes. These rates are multiplied by a company’s payroll to determine its workers’ compensation premium.
The rate for a class code can differ significantly from one insurance company to another. This is because different companies use different class codes specific to their state. In addition, the loss cost that is used to calculate the rate may also vary from one company to the next.
Competitive state funds work within the same market rates established by private insurers and provide a backup option for businesses that can’t secure coverage from private carriers. The disadvantage is that these policies are typically more expensive than those from private insurance companies.
In monopolistic state funds, the government-owned fund sets rates for all employers in a given state. The public subsidizes these rates. This can cause high-risk employers to abandon a state for competition and lower costs. This creates a problem because the mandate to provide workers’ compensation forces low-risk employers to subsidize the costs of high-risk employees.
As a result, the rates charged by monopolistic state funds can be high for some classes of workers’ comp.
Experience Modification Rates
A significant factor that drives premium rates is your company’s loss history. Insurance companies are aware that accidents happen, but high volumes of claims can highlight systemic concerns about how your business operates (and hence the need to charge higher premiums). Your company’s actual losses are compared to expected losses for your class code and industry type. Your company’s experience modification rating, or e-mod, is then used to adjust the manual premiums charged for the state compensation fund. A low e-mod is a credit to your manual premiums, while a high e-mod produces a debit.
Your e-mod is calculated based on three years of policy history, excluding your most recent past policy. Unlike claims history, which is a snapshot of your actual losses at the time of the incident, e-mod calculations use statewide loss data to predict future losses for your class code and industry.
Your e-mod will change yearly, and your WC rates will increase or decrease accordingly. But since each state rating bureau calculates e-mods differently, it’s best to contact your state insurance regulator or the actuary directly to determine how your e-mod is determined.
Administrative Costs
In addition to the actuarial factors that impact workers’ comp premiums, other costs are associated with operating the system. These include administration of the state insurance program, investment management, and billing and collection of assessments for primary workers’ compensation coverage. The State Fund is a quasi-public organization. The Fund contracts with outside vendors for actuarial and risk management, claims administration, and claim review.
Many states require that businesses carry workers’ compensation to protect their employees in case of a workplace injury, illness, occupational disease, or death. These states typically require that all employers obtain coverage from a state-approved carrier. Some states operate a competitive state fund, also known as the Residual Market or Assigned Risk Plan, which allows employers who cannot purchase coverage from private insurance companies to buy a policy through the state program at a controlled rate.
Most large and medium-sized businesses purchase workers’ comp coverage through a private insurance company or self-insure their risks. Smaller, less-risky firms are usually assigned to the State Fund. However, the state’s rates are sometimes the lowest. The State Fund often has higher rates than private insurers in many risk classes.
