Of all the different types of business insurance, workers compensation is one that most businesses think they understand the most. And relatively speaking, they do understand it more than their other coverages. However, in almost every conversation I come to learn that their opinion of it is usually misled. Often, I will hear business owners say, “well, that rate is determined by the state isn’t it?”. Or, “workers compensation is just workers compensation”.
For the most part, businesses aren’t totally wrong thinking that work comp is a commodity. But there are a few key differences that should be understood. In my opinion, businesses need to understand the specific company they are using and how their claims process would be good or bad for them as well as how their rates are calculated. Today, I’m going to cover the latter.
So where the hell do these numbers come from?!
Here it is, in it’s simplest form:
- We all know that the first thing to consider is your total payroll for the 12 month policy period. Companies charge based on every $100 of payroll during the policy year.
- Once your payroll is figured out, the first rate that gets applied is the insurance company’s base rate. This is the rate they file with the state for each specific type of business.
- After the base rate is applied, we have a starting point for your total premium. Next, (assuming you qualify for one), your experience modification is applied to the premium. If you have an experience modification below 1, you’re getting a discount. Above 1, you’re paying a premium.
- Lastly, there is a discretionary credit (or debit) that the insurance company can apply. If the insurance company “likes” your account, they can apply a “Schedule Credit” which would result in additional reductions to your premium. If you have a high experience modification or your carrier is tightening up, you may see a “Schedule Debit” which allows the company to charge more. This is often the most overlooked part of work comp premiums and it is by far the most impactful in most cases.
Here’s a few hypothetical scenarios:
- Solid experience mod, great schedule credit:
- $1,000,000 of annual payroll ($1,000,000 / $100 = 10,000)
- 10,000 x $2 base rate = $20,000 (your initial premium before experience mod & schedule credit)
- $20,000 x .95 experience modification = $19,000 (your premium before schedule credit)
- $19,000 x .6 schedule credit = $11,400 (your rough final premium)
- Higher experience mod & less schedule credits:
- $1,000,000 of annual payroll ($1,000,000 / $100 = 10,000)
- 10,000 x $2 base rate = $20,000 (your initial premium before experience mod & schedule credit)
- $20,000 x 1.05 experience modification = $21,000 (your premium before schedule credit)
- $21,000 x .95 schedule credit = $19,950 (your rough final premium)
- Solid experience mod, great schedule credit, higher base rate:
- $1,000,000 of annual payroll ($1,000,000 / $100 = 10,000)
- 10,000 x $2.75 base rate = $27,500 (your initial premium before experience mod & schedule credit)
- $27,500 x .95 experience modification = $26,125 (your premium before schedule credit)
- $21,000 x .6 schedule credit = $15,675 (your rough final premium)
Keep in mind, there are other, typically nominal factors that are added into your premium but this is a solid way to get a rough estimate.
In each of these scenarios, you can see the three different factors that go into configuring your overall premium. Of them, it’s important to understand what you can control and what you can’t. You CAN control your payroll as well as your experience modification (which is based on claims history). You CANNOT control the base rate or the schedule credit. But, you know who can? Your agent.
Next time you think your work comp rates are getting out of whack, check in with your agent. Are there carriers out there with more aggressive base rates? Is there something he/she can do to get an underwriter to offer more credits?
Knowledge is power when it comes to your work comp. The better you understand how your premiums are calculated, the more you can control your overall costs.
More questions on workers compensation or how any of your other business insurance rates are calculated? Feel free to reach out to me at hunter@mchughinsurancegroup.com!