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COMPETITIVE RATING
FOR WORKERS COMPENSATION POLICIES:
WHAT DOES IT MEAN?
Every insurer selling workers' compensation insurance
is now required to file with the California Department of Insurance (CDI) its complete manual which includes
. rate classifications
. rating plans
. rate deviations
. modification factors
. all applicable workers' compensation rates that will be charged by
the insurer
The CDI can only disapprove the rates submitted after
notice has been given and a hearing has been held to determine if the
continued use of the rates would tend to impair or threaten the solvency
of an insurer or threaten the solvency of an insurer or tend to create
a monopoly in the market pursuant to section 11732 of the C.I.C. The
intent behind making California a competitive rating state for workers'
compensation was to give the employer the benefits of competitive pricing
by insurers. This in turn is expected to encourage employers small and
large to be more conscientious in improving safety on the job to control
losses which should translate into cheaper insurance.
Q. How are premiums calculated?
A. First, the WCIRB groups all business
and industrial operations into various occupational classifications.
In 1995, over five hundred classifications existed, from advertising
companies to YMCA institutions. The WCRIB calculates the rate for each
classification based on the premium and loss experience of all employers
in each occupational classification. The rate is expressed in the form
of dollars and cents for each $100 of payroll per classification. The
basic premium is calculated by multiplying the rate (for each $100 of
payroll) and the amount per class. All classifications, rates and rules
are specified in the California Workers' Compensation Insurance Manual
published annually by the WCIRB. A carrier may start with a rate for
a classification and then apply credits and/or debits based on individual
risk characteristics. A policy is usually issued for a term of one year
or less and may also indicate the method of payment: monthly, quarterly,
semi-annually or prepaid with premium due on the effective date of coverage.
At the policy expiration, the insurance company may examine your payroll
and the rates that have been used to determine the final audited premium.
This usually results in an additional premium due the company or a return
premium to be refunded or applied to the renewal policy.
Q. What is experience modification?
A. Based on reported paid losses,
loss reserves and the premium of the policyholder for an experience
period, the WCRIB uses a standard mathematical formula that has been
approved by the Insurance Commissioner to generate an experience modification
for each employer. An employer is subject to experience rating when
the premium for a three-year period reaches a specific amount set by
the WCRIB. (Effective January 1, 1995, this amount is $14,100 in pure
premium; however, this figure changes periodically.) Therefore, the
employer's loss experience will affect his or her premium in the form
of an experience modification. When an employer is subject to an experience
modification, the modification must be shown on the policy and applied
to the premium developed by application of basic manual rates. Additionally,
an employer's premium can be further affected by the application of
debits/credits for individual risk characteristics, for example, premium
size, loss control programs etc. Note: all individual risk characteristic
are applied before the Experience Modification.
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