Workers’ Compensation insurance is one of the biggest expenses for businesses, particularly in industries with huge payrolls and high risks such as manufacturing. As a result, manufacturers are continually looking at viable solutions to reduce their Comp costs.
There are several tactics that make up a comprehensive strategy in driving down and containing Comp costs – everything from fostering a culture of safety that includes management leadership and commitment, supervisory and employee training, loss control, claims review and analysis, ongoing employee communication with the injured employee and return-to-work programs, and other proactive measures – to evaluating how premiums are determined to pinpoint any anomalies and areas of improvement.
Let’s take a look inside how Workers’ Comp premiums are established to understand what can be done to help reduce them. There are three factors that go into setting Workers’ Comp premiums: employee job classifications, the size of an employer’s payroll, and a company’s claims experience (experience modification factor).
Every state has a manual that includes class codes for each industry and job duty. Classification criteria starts with the industry, and is further broken down into specific businesses within that industry, and even further into job duties within that business. These codes are designed to account for risk, and there is a direct relationship between the codes and the premium charged by the insurance company. Data, for example, may indicate that employees working under one code are more inclined to get hurt than those falling under a different code, and therefore the Workers’ Comp claims would be higher as well as the premium. Additionally, if an employee is misclassified the rate differential can be significant and you may end up overpaying.
This is an area that should be examined closely. Having a spreadsheet with a list of employees and corresponding codes is helpful, and looking at all employee classifications including multiple sub-classifications is invaluable – this is something that the manufacturing insurance experts at Precision Manufacturing Insurance Services (PMIS) can do for you.
The basis for your Workers’ Comp insurance premium is your payroll. For each $100 dollars of your payroll, there is a specific rate, which is determined by the classification codes of your employees. Making sure your Workers’ Comp payroll figures are accurate is important, as there may be a difference between actual payrolls and Workers’ Comp payrolls. This is because Workers’ Comp premiums are typically calculated on an annual basis and will be quoted as an Estimated Annual Premium (EAP). The premium is estimated because at year-end, the insurer will conduct an audit and either apply a credit, issue a refund or ask for an additional premium if payroll is underreported. As specialists in providing Workers’ Compensation insurance for manufacturers, we can review your payroll audits for accuracy and for any potential problems.
The Experience Modification Factor
After calculating your base rate (payroll per $100 X classification rate), the insurance company will calculate your experience modification factor to determine your Worker’s Comp premium (payroll per $100 X classification rate X experience modification). The ex mod is unique to each employer and is expressed as a percentage that pertains to whether your loss history is below or above other employers within the same industry. Basically, the experience mod functions as an indicator that gauges the “health” of your manufacturing company.
The Workers’ Compensation Insurance Rating Bureau of California (WCIRB) calculates the experience mods. The WCIRB uses your actual loss history as it has been reported to the Workers’ Comp insurance company. If you fall within the average range as compared to similar-size companies within your industry classification, you would typically get an experience mod of 100 and would be charged the full base rate. On the other hand, if your business has an experience mod factor of 92, you might see an 8% savings, while a business with a factor of 133 would pay 33% more. As you can see, ex mods have a direct impact on premium rates and create a powerful incentive for each company to work to reduce workplace accidents and manage claims with a company-wide safety program and comprehensive accident claims processing and investigation.
In addition, errors can occur in determining a company’s experience mod, so it’s wise to analyze its accuracy. Sometimes the benchmark used to compare an employer’s loss experience to the industry average will change from one year to the next. This can impact your ex mod. And in certain industries, such as manufacturing, the assumption sometimes is made that the operation has more risk than it really does. Our experienced PMIS staff will evaluate your ex mod to see if any errors have been made.
There’s a lot to digest here and we would be happy to go over in more detail the factors that affect your Workers’ Compensation premium and the steps it takes to mitigate claims, reduce costs and lower premiums. In future articles, we will also be reviewing additional ways of reducing your Comp costs, including the importance of reporting injuries within a specific timeframe, effective employee communications, accommodating employee restrictions with alternate-duty assignments, combating fraud, and much more.
Precision Manufacturing Insurance Services is committed to helping protect manufacturers from the diverse and complex risks you face. This includes providing the safety net that insurance offers and the experience in helping you contain and drive down costs. For more information about how we can assist you, please contact us today at 855.910.5788.