Workers’ Compensation Premiums and Your Experience Modification Rating: Understanding the Connection and Achieving Maximum Benefit

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By Anita Setnor Byer

For many self-storage operators, purchasing workers’ compensation insurance is a statutory requirement. Even in the absence of this, a self-storage operator with only a few employees may want to consider the voluntary purchase of workers’ compensation to avoid the expense associated with litigation resulting from an on-the-job injury.  

But how much employers pay for this insurance typically depends on rates set by the respective insurers, individual states, or the National Council on Compensation Insurance, the nation’s largest provider of workers’ compensation data. Consumers are limited in their ability to bargain-shop for workers' compensation as they typically do for other types of insurance.

However, this lack of bargaining power doesn’t necessarily mean employers are powerless to reduce their premiums. In fact, employers can lower the cost of their workers' compensation insurance by maintaining a safe working environment.

Modification Ratings

Workers' compensation insurance provides indemnity and medical benefits to employees injured on the job. In the workers’ compensation context, the term “indemnity” refers to monetary compensation for lost wages resulting from an injury or accident occurring on the job that prevents an employee from returning to work. Each time an employee files a workers' compensation claim, the insurance company must make a payment on the claim. Needless to say, insurance companies prefer insuring safe, or safer, workplaces because there are presumably fewer claims to pay.

Thus, in an effort to encourage employers to maintain a safe working environment and reward those who successfully do so, experience modification ratings are used to adjust an employer's workers' compensation premiums. Employers who experience fewer or no claims are rewarded with a credit toward their premiums, while those who experience a higher number of claims may face increased premiums.

Determining an employer's experience modification rating, or experience mod, involves fairly detailed and complex calculations, which are designed to tailor the final premium cost to the employer's actual claims experience. In short, the experience mod compares an employer's actual workers' compensation claims, typically over a three-year period, with those of other employers in the same type of business with a similar number of employees. Thus, your self-storage facility’s employee-safety record as it compares to other facilities with the same number of employees will affect how much you pay in workers’ compensation premium.

If an employer's claims experience is consistent with the industry average, the experience mod is 1.0, which, when multiplied by the base premium, will not serve to increase or decrease the premium. However, if an employer's claims experience is 25 percent better than the industry average, the experience mod will be .75, which, when multiplied by the base premium, will decrease the premium by 25 percent. Alternatively, if an employer's experience is 25 percent worse than the industry average, the experience mod will be 1.25, which will increase the premium by 25 percent. Therefore, by maintaining a safe workplace, employers can significantly reduce their workers' compensation premiums.

Frequency vs. Severity

In addition to this basic understanding of the experience-mod rating process, it’s helpful for self-storage operators to know some of the features of the process so they can tailor their safety- and loss-control procedures and maximize some of the potential benefits. For example, since the cost of a specific workplace injury is statistically less predictable than the likelihood of an occurrence, the experience mod places greater weight to accident frequency than it does to accident severity. In other words, an employer having one loss totaling $100,000 compared to 10 losses totaling $100,000 will generally have a better experience mod. The employer suffering one loss is seen as the more stable risk.

Given the unpredictability of the total cost of an injury, the experience-mod calculation takes into consideration the possibility that any single injury could have astronomical costs, thereby making a higher frequency of claims a greater risk than a single, expensive claim. Since a workplace with a higher frequency of claims involves a greater risk, the experience mod will make the premium higher. Thus, self-storage operators have good reason to consistently maintain a safe working environment.

Employers should also know medical-only claims generally don’t have as much of an impact on the experience mod as indemnity claims. Since calculations sometimes reduce the value of medical-only claims by 70 percent, employers are not necessarily penalized when they occur. Moreover, the existence of open claims, or claims that have not yet been resolved, can negatively impact the experience mod, so employers benefit from getting claims resolved and closed.

Employer Rewards

In addition to adjusting an employer's experience mod, some insurance companies may reward employers by offering payments, typically called dividends, to insureds that eliminate or otherwise limit the number of claims filed by their employees. These dividends, which are reserved for the most attractive risks, are usually based on a sliding scale wherein the amount of the dividend decreases as the number of claims increases.

However, it’s important not to get too caught up in the most generous dividend percentage. For example, if an employer has a history of at least four workplace injuries per year, then it’s unrealistic to focus on the dividend percentage available only to those insureds experiencing no claims. When comparing workers’ compensation insurance quotes, the best approach is to focus on dividend percentages that comport with an employer's specific claims history.

Fully comprehending all of the aspects of the workers' compensation experience modification-rating system, including the manner in which it can be used to achieve the maximum benefit, can be overwhelming. Self-storage operators would be wise to consult an insurance agent familiar with the ins and outs of the rating system and available dividend plans. An experienced agent can also make sure workers’ compensation claims are filed properly so business operators can take full advantage of the benefits conferred.

For self-storage operators as for all employers, maintaining a safe work environment remains the best way to reduce the cost of workers' compensation insurance, even in states with relatively high premiums.

Anita Setnor Byer is president of Setnor Byer Insurance & Risk and founder of The Human Equation, a risk-management and human-resources enterprise providing online training and solutions. She has served as an independent consultant and risk-management advisor since 1997, and has authored numerous publications and training content in risk-management and human resources. To reach her, call 888.253.8498; e-mail anitab@setnorbyer.com .

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