Workers Compensation Insurance is specifically based upon your work classification and your history of safety.
Workplace safety programs directly affect a company’s safety experience which in turn affects it’s experience modification, which in turn helps determine workers compensation insurance costs.
The workers compensation experience modification (experience mod) process helps insurance companies charge your company for your insurance program based upon your historical loss experience.
This means you get to decide how you will manage the cost of your workplace safety insurance programs. The more your company manages your safety risk, the less insurance companies will charge you to insure your risk.
Your company is compared with companies in the same industry, and your company’s performance determines your experience modification. All companies begin with a 1.0 experience modification the picture below is an example of how your cost may vary based on experience. The worst case scenario here reflects a high experience mod, associated higher tier costs, and the cost of the assigned risk plan.
Other multipliers that credit or debit your workplace safety insurance program may come from associations you join, or programs you are assigned to based on your previous safety performance.
ARAP is the Assigned Risk Adjustment Program; it is a surcharge that is applied to employers who must get their insurance through the assigned risk market.
LCM is the Loss Cost Multiplier. This is the tier in the figure above. Each licensed workers ‘compensation carrier files one or more loss cost multipliers to account for their costs of doing business over and above the loss cost. A carrier with more than one loss cost multiplier will use its preferred or lower LCM for risks with better-than-expected losses and use higher multipliers for average or non-preferred risks. The Insurance Division does not allow a voluntary market LCM to exceed the assigned risk plan LCM. In the assigned risk plan, NCCI files the LCM for the plan, which only reflects expenses. The 2006 LCM is 1.639 times pure premium, the same as the highest loss cost multiplier allowed in the voluntary market.
When your company is evaluated for your experience modification, they are looking at the first three of the previous four years. Your expected losses are compared to your actual losses as compared to other companies in your industry with the same WC classification code. The immediately previous year or “Green Year” is not in the equation for the current year’s Experience Mod.
Frequency of claims is actually more important in figuring out your experience modification than the severity of the claim.
For example, five claims each costing $4000.00 brings $20,000 worth of losses to be entered into your experience modification calculation. That is worse than one single claim costing $20,000 which brings $5000 worth of losses to be entered into your experience modification.
This is a difficult thing to explain and if you are curious, I recommend you talk with your insurance agent about it. The bottom line is that in workplace safety, frequent small claims are worse for your company than a single severe or high cost claim.
