Workers’ compensation costs employers an average of $1.37 per $100 of payroll. That figure can vary widely, because dangerous occupations cost more to insure. The base cost for construction work could be $15.00 or more per $100, while it could be less than $0.25 per $100 for bank tellers. These figures on their own may seem small but, when applied to payroll for a workforce, they mount up fast. Understanding how your premiums are set may help lower your rates.
All but the smallest employers pay or receive an “experience rating” adjustment. The process of experience rating includes using a mathematical formula that compares the dollar amounts of an employer’s losses to the amounts that would be expected for that type of employer. If losses have been higher than expected, the employer pays a surcharge on its workers’ comp premiums. If they have been lower than expected, the employer receives a credit.
The factor, known as an experience rating modification (or “mod”), is expressed as a number greater or less than one. A 10% surcharge would be expressed as a modification factor of 1.10; a 10% credit would be expressed as 0.90. The insurer multiplies the workers’ comp premium by this factor to determine the base premium.
The formula limits the effect of individual large losses. It recognizes that employers with safe workplaces can sometimes be unlucky. It also recognizes that employers who have frequent smaller losses are likely to have poor loss records, and possibly large individual losses, in the future. Therefore, an employer with one $50,000 loss will have a lower experience mod than an employer with ten $5,000 losses.
Insurers use experience rating because they have learned over the years that past performance often predicts future results. For employers, experience rating provides an important incentive to invest in safe working conditions. If a business has an experience mod greater than 1.00, there are several things it can do to reduce its future workers’ comp costs.
A mod between 1.01 and 1.25 means that loss experience has been worse than expected. An employer in this range should review the losses to identify patterns. Are they concentrated in one or two departments? Do most of them happen to new, untrained employees? Do they tend to happen when employees are using certain tools or machines? Answering these questions will help identify problem areas.
A high mod is a clear indication of safety problems. It also indicates frequent losses that should be investigated to get to the root causes of the injuries, possibly with professional help. A business can hire a qualified safety manager to get the situation corrected, but the insurer may insist on involving its own loss control staff.
Employers with lower experience mods save money on their workers’ comp costs. This enables them to lower their bids for work without sacrificing profit, making them more competitive. Good safety records also make a company more attractive to insurers, resulting in competition for their business and possibly even lower costs.
The Right Thing To Do
Although paying for workers’ compensation insurance can seem like a burden, it’s a cost that you can manage to some extent. Plus, making the workplace safer is both the right thing to do for your workers and a smart move for the bottom line.