Workers’ compensation insurance agents are paid a commission based on the size of their company’s premium. The higher the premium you pay, the higher your agent’s commission. Your agent may never cause your premium to increase unnecessarily, but have you done everything you can to lower it and lower your commission?

The first workers’ compensation law was enacted in the United States in 1911 by the state of Wisconsin. In 1948, all states had some form of “workers’ compensation.” Basically, it is a government-required social security pact between employers and employees. Employers are forced to cover health care and replace wages for employees injured on the job – in return, workers’ compensation benefits become the only remedy available to workers. Although the courts have upheld this concept for nearly a hundred years, occasionally, in bad faith cases, the courts have overruled this exclusive remedy.

Workers’ compensation is mandatory insurance in all states except Texas. With a few exceptions, all employers are required by law to carry workers’ compensation insurance.

The Workers’ Compensation Insurance premium is calculated based on the classification of employees for their specific job and the rate assigned to each classification of employee.

Workers’ Compensation insurers attach a premium rate to each employee classification code. These rates must normally be approved by the state insurance regulatory agency in the state in which the policy is in force. Agency approval of the rate is based on numerous elements. One of the elements that are taken into account is the adequacy of the rate. Rates must be adequate to maintain the financial condition of an insurance company. Proper rates allow the insurance company to maintain a surplus to cover current and future claims.

The classification code and its corresponding premium rate are part of the formula. The premium rate itself is expressed in dollars and cents per $ 100 of payroll. Payroll is estimated for each classification code and then each $ 100 is multiplied by the rate. The amount calculated is the base premium. The base premium is then modified (raised or lowered) using experience modification and rating plans.

The experience modification is calculated from the losses that the company has reported in the past.
The insurance company used a government-approved formula to calculate an experience modification for each employer. The formula looks at losses paid, reserves needed for claims made, and payroll amounts for the last three years (generally). The Experience Modification displays the average loss experience of employers with similar classified employees and works as a way to compare employers. The experience modification is added to the class fee, along with any other modifications, and an estimated premium rate is created. This is called prospective qualification and is the most commonly used rate plan.

The total premium for a workers’ compensation insurance policy is unsecured until the policy period is completed and all payroll is reported.

Now that you know how fees are calculated, what is the “Dirty Little Secret”? In thirty years of working with companies, I have never entered a company of any size and found that its employees are correctly classified. The classification process is many times more of an art than a science. Different people may view the same job and rank it differently sometimes with extremely different results than the premium. Many rating titles are very similar but with very different rates. There are many jobs that do not have a specific classification but that must fit into something that makes sense. If the insurance company decides the rating, do you think it will be the best possible option for the lowest employer premium?

If an employer is not only knowledgeable but aggressive about ratings, who will see to it that they are the lowest possible premium rates? The insurance company makes more money with higher premium rate ratings. The risk to the insurance company does not increase if the employee is wrongly classified in a classification that imposes a premium rate of, say, $ 10.13 per $ 100 of payroll, such as a rate of $ 1.01 per $ 100 of payroll. The insurance company only makes ten times more income. If there is a claim, the same amount will be paid regardless of what the premium was.

The insurance agent who supposedly takes into account the interest of the employer earns ten times the commission if an employee is poorly qualified as in the previous paragraph. Will it take your time, energy, and effort to deliberately cut your commissions by suggesting rate changes over your company’s objection?

If, as an employer, you don’t have in-depth knowledge of classification and qualifications, you need to get the knowledge or hire someone who does. You can’t trust your agent to be objective about it. You’re talking about taking money out of your pocket and out of the pocket of the people who pay you. It doesn’t pay you what the insurance company does. It pays you a commission on what you sell. Not necessarily what you need. Your agent may be doing a great job, but wouldn’t you want to be sure?