What Is A Workers Compensation Insurance Experience Rating?

I attended a workers compensation related seminar this past week on the subject of  insurance and more specifically, the infamous “experience rating.” Five minutes after the seminar began, I was reminded how complicated the subject is when it comes to the statistics and calculations of experience ratings. I figured it would make a good insurance blog topic if I could somehow weed out the x’s and o’s and put it into layman’s terms on what it all means to you, the business owner who has an experience rating tied to your workers compensation insurance policy.

What is an experience rating?

California’s workers’ compensation experience rating system is a rating system intended to provide employers a financial incentive to reduce work-related accidents. It’s a method for adjusting premium rates to reflect an individual employer’s claims history. Essentially, it predicts an employer’s future losses based on past experience and compares the loss or claims history of one company to all other companies within the same industry/classification.

Employers may receive discounts off their premium for good claims records or may be surcharged for their poor claims records.

There are approximately 500 different business classifications used to describe the various types of businesses in California. Businesses assigned to your SIC (standard industry classification) are relatively similar to your business, however, there are differences which can have an impact  on workers’ compensation claims costs. To address these variations and encourage workplace safety, experience rating adjusts the premium  you pay either upward or downward based on a comparison of your company’s history of payroll and claims to what is expected for businesses of similar size within the same industry classification. This comparison results in your “experience modification.” An experience modification greater than 100 results from less favorable loss experience compared to the average of other similar businesses, and vice-versa, an “ex-mod” less than 100 results from more favorable loss experience compared to the average of other similar businesses .

Experience rating places more emphasis on the frequency of injuries than on the severity. An employer with one large loss ($100,000) will pay less for future insurance than an employer with 10 smaller lost time claims of $5,000 each – a total of $50,000 in losses. Experience rating cushions the blow of a large loss, but hammers employers with frequent losses.

What is the need for experience rating?

• To provide a direct financial incentive for employers to reduce accidents and encourage safety– This allows employers to develop loss control programs and establish safety programs which create premium incentives.

• To distribute the cost of insurance equally among employers in an industry classification– The reality is there is no “average” employer for a given classification code. The experience modification takes this into account to encourage the emphasis on loss control. Differences in management practices and methods of operation are reflected in final premium.

Who gets experience rated?

All California employers meeting minimum qualifying premium (Qualifying premium for 1/1/2011 is $16,700 and is amended annually). This accounts for approximately 120,000 employers in CA. Qualification is automatic and mandatory.

So what does this mean?

The science to determining your experience modification is pretty complicated. What you need to know is you want to keep your experience modification down, as it will bring your workers compensation premium down. To do help do this, you should  develop loss control and safety programs to control work related injuries. It starts with you. Your management practices and methods of operation are reflected in your final workers compensation premium. If you don’t know where to start, contact your agent or carrier. Insurance carriers will help customize a loss control program for your business. They want to control loss just as much as you do.

Resources: WCIRB California; State Compensation Insurance Fund

–JK