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WORKERS PENSION - Compensation policies

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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