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Lowering Workers' Compensation Premiums

Lowering Premiums by Understanding how Premiums are Calculated


Workers' compensation is a mandatory business insurance. You cannot do business legally in your state with employees if you do not have workers' compensation insurance or your business is not legally qualified as "self-insured." There are some exceptions for some family businesses, agriculture, some maritime or federally regulated business, but the exceptions are so few that, for purposes of this article, assume your business needs workers' compensation insurance

As a necessary cost, it is critical to control and lower that cost if possible. Doing so requires an understanding of how your premium is established and what can be done to lower certain factors affecting that rate.

Understanding how Premiums are Calculated
Premiums for workers compensation ares calculated by the following formula:

RATE X $100 payroll X Experience Modifier = PREMIUM
There are two critical variables in the equation: rate and experience modifier.

Understanding Your Rate
Every year, your state will categorize your industry. The state will assess risk based upon actuarial calculations. Typically, states follow the National Council on Compensation Insurance (NCCI) in determining the classification and rate. The rate is based on a myriad of factors. The NCCI classification for clerical work, 8810, is usually the lowest, while the classification for the construction trades (especially carpentry, 5645) is usually the highest. Why? Carpenters get hurt on the job and secretaries do not.

Understanding Your MOD
The experience modifier is also a critical part of the calculation. It is typically referred to as your MOD. The MOD is a numeric representation of your business's loss and claim history. It is calculated differently by states. In general, a brand new business will have a MOD of 1.00. But, look how this is used in the formula. It is a multiplier on the premium. If your claims history is low it will decrease. If your claims history is high it will increase. For example, a MOD of .90 acts as a 10% discount on the premium while a MOD of 1.10 acts as a 10% increase.

Premium Based on Every $100 in Payroll
The final premium is a multiple value to be applied to every $100 of payroll. For example, a rate of .08 with a MOD of 1.00 results in $8.00 of annual premium for each $100 of payroll or $8,000 on $100,000 in payroll.

Control and Lower MOD to Lower Premiums
Your business will have little control over the broad industry it is in and little effect on the Rate assigned by the state. But, your business can dramatically affect premiums by lowering its MOD.

  • Make Safety a First Priority - A safe workplace (onsite and offsite) lowers the number of worker injuries. If possible, budget for an outside safety evaluation and implement the changes suggested. Mandate employee safety training. Show employees what an amputation or electrical burn looks like to reinforce safety. Because the MOD variable in the premium equation is a multiple, every small reduction leads to big savings.
  • Enroll in State Sponsored Programs - Every state sponsors programs to improve safety in return for a deduction in the MOD rating. In my state, Ohio, employers can get a deduction for participating in the Drug-Free Workplace Program. There are deductions for allowing inspections or focusing on certain injuries. The programs are available and you need to research them. The programs are not easy and compliance can be difficult, but not to the business that puts safety as its first priority.
  • Become Part of a Group for Group Rating - Most states offer large discounts to recognized groups. This is called group rating. Technically, this discount is a rate discount, but I put it under MOD because in order to qualify for most groups, your business must have a better than average safety history. New businesses may not qualify. Start now to implement a safety first mentality with the goal of becoming group rated.

Review Your NCCI Classification - Accountants will tell you that most workers compensation programs have a 30-35% error rating when it comes to business classification. Do not use one classification for your business and have a professional prepare your classification paperwork. Classify all of the employees individually and demand proper classification. In the example above, a secretary in your business classified as a carpenter (because she works at a carpentry contractor) can cost thousands in premium dollars. This is because a carpenter's rate is two or three times as much as a secretary's premium rate.

Review Payroll Figures - Like NCCI classifications, payroll calculations are frequently wrong or not estimated correctly. A professional review of payroll history can result in a lower estimated payroll and lower resulting premium.

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