Risk Management Does Not Administer the State's Workers' Compensation Policy, but..

Risk Management does administer a number of commercial workers' compensation (WC) insurance policies for quasi-state agencies and some special State programs. Here are some frequently asked questions and answers about the premium associated with these policies.

How are WC policies rated?

The rating is sequenced as follows:

1. Establishing the correct classification for the entity and its employees based on manual rules and classifications.
2. Assignment of correct payrolls to each classification.
3. Calculation of manual premium by the application of manual rates, premium discounts (if applicable) and experience modification for each classification to the appropriate payroll.

Why are employees placed in different classes and why are these classes rated so differently?

WC insurance protects employees from losses resulting from work-related injuries and diseases. Different occupations represent different physical occupational hazards. An office worker, for example, is not exposed to the same dangers as a construction worker. A park ranger is exposed to different hazards than a marine patrol officer. The object of the classification system is to group employers with similar exposures into classifications so that the rate for each classification reflects the exposures common to those employers. The system aims to apply equitable rates to employers within the same classification. Occupations with higher exposures pay more and vice-versa.

Tip. As an employer, you know exactly what your employees do. Since classifications that sound similar may actually carry quite different premium factors, work with Risk Management to ensure that your employees are properly classified. One organization may have one, a few or several different classifications.

Why is payroll used to calculate premiums and what records does the insurance company use?

Payroll serves as an effective basis because it varies directly with the exposure covered (the higher the payroll, the more exposure), it is relatively easy to determine from available records and it is not readily subject to manipulation by the employer. Payroll is determined by payroll records, individual earnings records and tax records. Payroll, for workers' compensation purposes, generally means money or substitutes for money (such as a tool allowance). A manual exists for the purpose of determining what is or isn't considered payroll for this purpose.

Tip. At the beginning of a policy term, you are asked to estimate your payroll for the upcoming 12 months. Do your very best to estimate as closely as possible. Take into account staffing (increases and decreases) or program changes that you anticipate, as well as ongoing union negotiations which might increase payroll. Your estimate will eventually be audited and your final premium adjusted. A good estimate allows for accurate budgeting.

What is the experience modification factor?

Simply put, your organization's loss experience is compared to that of similar organizations. If you are better than average, a credit is applied. If you are worse than average, a surcharge is applied.

Tip. While you have minimal control over the first two premium factors (classifications and payroll), your effort (or lack of effort) in controlling, preventing and reducing losses is within your control. Your insurance company is anxious and willing to work with you in this area. If you haven't already, contact them and get started with a loss prevention program. A good program will positively impact your loss experience, which will eventually earn you lower premiums. Also, ask for loss runs. Review them to see if any errors were made. Bring any questions to Risk Management Division and let us help you find answers or make corrections.

Why will my premium be audited and what can I expect from an audit?

Because your policy was issued based on estimates, after the policy expires your actual records will be examined to determine the actual final premium due to the company. The auditor may examine the classification code assigned to each employee to be sure proper classifications were used. The auditor will look at various records to determine the actual total amount of payroll to be assigned to each classification. You may be entitled to certain discounts and dividends. The auditor should make sure these are applied correctly. After this process is complete, a final audit report will be issued and it will likely result in the issuance of an additional premium due or a refund due.

Tip. You should prepare for this audit by making sure your records are organized and accessible. You should plan to spend some time with the auditor to explain the fine points of your business and answer any questions. This will ensure proper classifications are used. You should examine the final audit report to see if any errors were made. This audit will also assist you in estimating payroll for the upcoming 12 months. Results of audits should never be a monetary surprise.