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Workers Compensation: A Skyrocketing Cost

As companies are preparing their budgets for 2003, many are finding that the cost of employing their workforce has increased. Workers compensation rates in many states are skyrocketing and employers want to know what factors are contributing to the rising costs.

One possible explanation is the mounting medical costs that are being felt nationwide. California is one of many states that has been deeply affected by inflated medical expenses and are passing on these costs to employers. The California Department of Insurance reports that even though non-fatal injuries have gone down, claims costs in California have increased from $3.5 billion in 1995 to almost $6 billion in 2000.

Another rationale for heightened rates is that states are increasing benefit dollars to injured workers. California recently passed legislation increasing the maximum benefits from $490/week in 2002 to $602/week in 2003, $728/week in 2004 and $840 in 2005.

An additional factor contributing to higher rates can be attributed to the low rates that we experienced in the early 1990's. During this time, fierce competition drove rates down drastically. As a result, many insurers were unable to survive and ceased operations. Consequently, employers have fewer choices, and in some instances, only very limited availability for higher risk classifications.

How is your insurance rate calculated?

Each state varies slightly in their methods for calculating insurance rates and there are numerous variables used to determine your company's level of risk and yearly premium.

A starting point for calculating workers comp premium is the "base rate" for your state, which is a rate classification usually provided by the National Council on Compensation Insurance, and calculated using an analysis of businesses in your industry. You can find your company's classification code by visiting The National Council on Compensation Insurance website.

When you initially sign up for workers comp insurance, your premium is primarily determined by what fraction of your payroll is allocated to each classification, with different classifications carrying their own risks of injury. Rates are determined partially by classification, based on each $100 of payroll. For example, an administrative employee might have a rate of $0.10 per $100 of payroll, multiplied by the number of employees in that category. In contrast, a construction worker might have a rate of $20 or $25 per $100 of payroll, because of the nature of the job and the risks associated with it.

When you are first insured your rate is determined by the history of your company's industry. Thereafter your rates are determined by using the three-year history of claims for your Company. The frequency of your claims and the compensation paid out by the insurance company are considered, so that the final premium reflects a combination of your losses and the insurer's expenses.

How you can help keep costs down?

As an employer there are several precautions that you can take to keep costs at a minimum and protect your workers from injury.

First, develop a clear safety policy that is communicated to all personnel through training programs and safety manuals. This can be conveyed through your corporate culture in newsletters, videos and internal materials. Additionally, it is wise to check that all equipment is safe and that the staff has received adequate training on operating procedures.

Secondly, have a plan to get injured workers back to work as soon as possible. If a doctor has placed limitations on the position of an injured worker, ask the doctor if the employee could perform his/her job with the exclusion of certain duties. This is best done when there is a clear job description available for easy reference. Once the employee returns to work, they are no longer being paid insurance benefits, therefore resulting in lowered cost of the claims.

In some states it is allowable for the employer to pay first aid treatments in lieu of reporting the injury as a claim to the insurer. As was discussed earlier, since frequency of claims drives your premium, the fewer claims reported to the insurer, the lower your rates will be.

Finally, it is best to educate yourself on the different insurance plans available and chose an experienced broker who will provide the best policy for the lowest cost. Several options other than the Standard Guaranteed Cost Plans are gaining popularity and could save your company money over time. These plans include:

A. Deductible Plans
B. Retrospective Rating Plans
C. Captives, Pools, Risk Retention Groups & Other Alternative Financed Programs
D. Self Insurance Plans

By taking these precautions, educating yourself and making safety a priority you can control the amount of injury claims and increase your bottom line!