Since Workers Compensation Insurance (“WC”) happens to be one of the costliest expense items for a business, it is particularly important that the policyholders understands the components that make up the overall cost. Good insurance agents should be walking you through the coverages, but this isn’t always the case, and sometimes, the business owner is stuck trying to figure out what they are actually paying for on their own.
Let me explain some basic pricing components.
Loss Cost (“LC”) = This is a base rate that is the foundation for every WC quote. The rates are typically established by the National Council on Compensation Insurance (NCCI) or by your resident state. The rate is displayed as a dollar value rate per $100 in payroll. For example, the base rate in PA for the Home Health – Non Professional Staff (0943 class code) is $1.325 per $100 in payrolls.
Loss Cost Multiplier (“LCM”) = Every WC carrier files for an LCM with a state which will serve as its multiplier (eg 1.40 or 1.78) to determine the carrier’s respective base rate. Often times carriers may have multiple underwriting papers or underwriting companies on which they can issue you a policy. The more competitive they may want to price your account, the lower the LCM they will want to use. Conversely, ff your account has had claims issues and underwriting concerns, they may want to use a higher LCM, or possibly decline to quote altogether.
For example, Travelers Insurance has about a dozen of such companies – Travelers Property Casualty Co., Travelers Indemnity Co., and United States Fire Insurance Co. are just several examples.
Experience Modification Factor = This is a factor provided by either NCCI or by the resident state. The Experience Mod Factor does not vary from carrier to carrier. This is a factor assigned to your company based on your claim history. An Experience Mod Factor of 1.00 means that your past claim experience is exactly the average of other companies in your industry and in your state. Anything less than 1.00 means your claim history is better than the average. Anything more than 1.00 means your claim history is worse than the average. This factor is then applied directly to your base rate.
You are also not assigned an Experience Mod Factor your first year in business, and likely not for the first three to four years.
Scheduled Credits/Debits = In addition to carriers filing their LCM with the state, they also file for allowable credits and debits that they can apply to a quote. These factors tend to be a bit more subjective and a good insurance agent is attempting to negotiate the best possible credits that can be applied here. The underwriter and agent may also provide recommendations that the business could implement to help achieve the best possible credits.
Premium Discounts = You will also see a line items on the quote or policy titled Premium Credits or Discounts. This cannot be negotiated, it is merely a percentage discounts applied to your account based on your premium size. An account with $10,000 in payrolls will have a much smaller credit than an account with $20,000,000 in payrolls.
Other Credits/Debits = There are other components that may impact your premium. For example, increasing Employers Liability limits, state taxes and assessments would increase your premium.
Example
Class Code: 0943 Home Care Non-Professional Staff
Annual Payroll: $2,000,000
All Insurance Co. (Rate): $2.12 ($1.325 LC x 1.60 LCM) – per $1,000 in payrolls
Manual Premium $42,400
Premium Calculation
Manual Premium: $42,400
Experience Mod Factor (.90) $38,160
Schedule Credit (.85) $32,436
Premium Discount (10.432%) $29,055
Taxes and Employer Assessment (3.0%) $29,927
Total Premium $29,927
