Key Factors when Calculating Workers’ Compensation Insurance Premium
KEMI calculates insurance premium based on five key factors: payroll, classification codes, base rates, the experience modifier (also known as the “Emod”), and rate adjustment factors (RAF).
The first element in the calculation of workers’ compensation insurance premium is payroll. The total payroll by classification is the basis upon which the premium for a workers’ compensation insurance policy is determined. Policies are written with an estimated payroll, which are then subject to a premium audit at the conclusion of the policy term to determine the actual payroll amount. If the actual payroll amount was lower than the estimate, the policyholder will typically receive a refund of a portion of the premium paid. Conversely, if the actual payroll amount was higher than the estimate, the policyholder will typically owe an additional premium.
Classification Codes comprise the second element of premium calculation. Classification codes are established by the National Council of Compensation Insurance (NCCI). The classification system is designed to group employees with similar exposures (risk of injury) into the same classification. There are approximately 600 classifications describing various operations. Each business is assigned a governing class that best encompasses the primary exposures faced by a company. It is important to note that classification codes are assigned based upon the business operations of the insured, and not the duties of individual employees within the business.
The payroll for each class is divided by $100 and then multiplied by the third element of the premium calculation, the base rate, to arrive at a “manual premium”. Rates are established based on the claims experience of employers across the Commonwealth. The total amount of payroll and incurred claims for each classification is reported to, and evaluated by, the National Council of Compensation Insurance (NCCI) to establish a loss cost for each classification. In an effort to account for the expenses necessary to provide workers’ compensation insurance coverage, a carrier’s expenses are then added to the loss cost through a Loss Cost Multiplier (LCM) to establish the base rate. We utilize data from NCCI’s Annual Loss Cost Filing in KEMI’s ratemaking process. However, as the largest provider of workers’ compensation insurance in Kentucky, KEMI also relies significantly upon our own loss data.
The “manual premium” is then multiplied by the fourth premium element, the experience modifier, to arrive at a “modified premium”. An experience modifier (sometimes called an experience modification or e-mod) is an adjustment of an employer’s premium for worker’s compensation coverage based on the losses the insurer has experienced from that employer. Typically, three full years of payroll and loss information is used in the calculation and produces a factor that is applied for one year.
The experience modifier is calculated by the National Council on Compensation Insurance (NCCI) according to the terms of the Experience Rating Plan Manual. The plan is mandatory for all employers who qualify (in general, an average of $5,500 in premium for three years).
The average experience modifier for a given industry is a factor of 1.0. If the actual claims experience in the rating period is higher than the expected claims experience for the industry, the experience modifier will be above 1.0 and will increase the premium calculation. An experience mod above 1.0 suggests an employer is more likely to have claims than other employers within its industry.
Conversely, if the actual claims experience for an individual employer was lower than the expected claims experience for the industry, the experience modifier would be below 1.0 and will decrease the premium calculation. This factor would suggest an employer is less likely to have claims than other employers within its industry.
If a business does not qualify for experience rating, a factor of 1.0 is used in the premium calculation.
Rate Adjustment Factors
The fifth element of the premium calculation is the Scheduled Rate Adjustment Factor. Following the application of the premium elements previously discussed, there may be situations in which the resulting premium does not adequately reflect the exposure or experience of a specific policyholder. A Scheduled Rate Adjustment Factor is available for the purpose of adjusting the premium to reflect individual characteristics of the employer’s operations that may not be reflected by its experience. In those scenarios, KEMI may apply a rate adjustment factor, in the form of a scheduled debit or credit that increase or decrease the policy premium.
There are additional items that are included in the premium calculation process such as Expense Constants, Increased Employers’ Liability Limits, Premium Discounts, and the Kentucky Special Fund Assessment. If you have questions regarding these items, or any other element of the premium calculation, contact us.