This week we’re going to go over some frequently asked questions regarding workers’ compensation insurance policies. Both new and weathered business owners alike frequently have questions about workers’ compensation insurance. Here are some of the most frequently asked questions we’ve encountered from a variety of our clients.
Question: Do I need workers’ compensation insurance?
Answer: That depends (most likely yes). In the state of California, if you have even one employee then it is mandatory that you purchase workers’ compensation insurance. If your business is entirely owner operated, you don’t need to purchase workers’ compensation insurance. If your business has employees you must carry this type of insurance.
Answer: There are a few pertinent factors to how workers’ compensation policies are priced by insurance carriers.
First, it’s important to know that each employee falls under a class code. Class codes are determined by the nature of the business and the type of work that employee is doing. For example, the class code for clerical work is 8810. Each class code then has a base rate filed with the WCIRB (Workers’ Compensation Insurance Rating Bureau).
The next factor that determines pricing is the amount of payroll the business pays that employee for the year. Let’s say a business has one employee that is paid $30,000 dollars a year under class code 8810.
The final factor that determines premium is an ex-mod rating, or experience modification factor. High ex-mods indicate an insured has claims. Low ex-mods reward those who have been free of claims. Some businesses don’t have ex-mod ratings. This is usually due to their payroll not being high enough to qualify for one within a class code. In this case, the carrier will use an ex mod filed with the National Council on Compensation Insurance for that class code. Otherwise, the formula for determining workers’ compensation pricing general looks like this:
Payroll x Classification Rate x Experience Modification Factor = Premium
And that is how insurance carriers begin to price out workers’ compensation policies. There’s additional factors, but this is how they come to a base price and then go from there.
Question: I haven’t had any claims on my workers’ compensation policy. Why has my rate increased on the renewal?
Answer: Usually a rate increase on a policy that hasn’t had claims is a direct result of what’s going on with the insurance carrier’s overall losses within a class code. Suppose a policyholder has been perfect. If other policyholders within that class haven’t, the carrier experiences a loss. The carrier must then compensate by raising everyone’s rates to maintain the ability to pay out claims. This is generally a good time to shop for new quotes with other carriers. Call your agent to find out why the rate went up. Ask your agent to attain new quotes. You may find a better policy and you may not. This is only something your agent can help you with.