Workers Comp starts out as a fairly simple formula. Your payroll times the rates equals your premium.
First, let’s look at the rates, those things that always seem to go up. Where do rates come from? They come from the Workers Comp Insurance Rating Bureau (www.wcirb.com), a private non-profit association that collects data on workers comp claims and determines what it should cost, as a percentage of payroll, to pay for said claims. Every year (and sometimes mid-year) they publish the “Pure Premium” rate for each classification of employee for every industry (there are about 700 different classes) – which the Insurance Commissioner must approve of – that the insurance companies use to determine how they will establish their rates. Kind of like how the prime rate is to lenders, so is the Pure Premium rate to insurance companies. Rates are the biggest driver in the cost of your workers comp insurance. The more injuries employees in your class of business get, the higher your Pure Premium rate will be. As you can expect, the riskier businesses like construction and agriculture tend to have higher rates than the low-risk ones like office workers and sales people. Also, rates tend to trend upwards because employee injuries tend to get more expensive to treat every year. California is an expensive state, although recent reforms have actually caused a slight decline in rates.
Once you have a rate, based on your classification of business and the duties of your employees, you multiply it by your payroll. If you are a restaurant (class code 9079) and your rate is 5% and you have $1,000,000 in annual payroll, your annual premium would be $50,000.
But it doesn’t stop there; this is just beginning. The first thing that will happen to your premium is it will become subject to your Experience Modification (Xmod for short), if you have one. Whether you have one is determined by how big you are. Simply put, the Xmod determination goes like this: the WCIRB has a threshold that you have to meet in order to qualify for an Xmod. They take three years of your historical payroll, multiply it by the Pure Premium rate for your class of business, and if it’s greater than the threshold, you qualify. If not, you don’t. If you qualify for an Xmod, the WCIRB will apply another formula to determine what it is. They again take three years of your historical payroll as well as data on any claims paid to your injured workers. It’s a long complicated formula, but in the end your Xmod will be a credit or surcharge that applies to any workers comp policy you get. Let’s say you’re that restaurant above with a $50,000 base premium. And let’s say your Xmod is 90%. Your modified premium would be $45,000. ($50,000 x .9 = $45,000). This is perhaps the second biggest influence on your premium after rates. I’ve seen Xmods as high as 200%.
Next are company credits and surcharges. This is always interesting. You will often have insurance companies apply both credits and surcharges at the same time. Why do they do this? Why don’t they just apply one credit or surcharge? Or why don’t they just lower or raise the rate? This is because insurance companies are bound by the rates they file with the state of California. If they say they’re going to offer a 5% rate for restaurants, that’s what they have to offer. But subjectively they can credit and/or surcharge the rates after the fact. For example, because a business is located in a region that has lots of claims, the business may get a surcharge, but then because that same business has no claims itself, the insurance company may apply a credit to the surcharged rate. To continue with our restaurant example with a $45,000 modified premium, say they get a 15% surcharge because they’re in LA (sorry LA, you have lots of claims) but then they’ll get a 5% discount because they themselves have had no claims. It looks something like this: $45,000 x 1.15 x .95 = $49,162.50
Last come the assessments. These are the taxes and fees the state of California makes everyone pay. It’s kind of like sales tax. There’s a long list of them and they end up being about 3% (as of the time of writing this) on top of the premium. They look a little like this:[/vc_column_text][vc_single_image image=”2582″ img_size=”full” alignment=”center”][vc_column_text]In continuing our restaurant example, once the assessments are added to that policy, the premium of $49,162.50 will now be $50,637.38.
There are a few other little fees that can show up, like Expense Constants, monthly reporting fees, and broker fees, but for the sake of focusing on the important parts that make up the majority of your premium, and keeping this post fairly succinct, I’m not going to spend any time on them.
So there you have it. That is my attempt to explain why your workers comp is so expensive. I hope it helps.
Gillespie Insurance Services helps people and businesses in California, Arizona and Nevada.