Have you ever looked at your worker’s compensation bill and wondered, “How did they come up with this price!?” Well to answer your question, it’s basically calculated using a three-part formula. But that probably doesn’t provide much more clarity for you, so I’m going to explain each part in a series of quick-read, posts. By the end, you’ll understand the numbers used to calculate your premium and the formula for doing so.
Here is part one.
Part 1: Your Workers’ Compensation Class Codes
The first component we’ll look at is the workers’ compensation class code. The codes are established by The National Council of Compensation Insurance (NCCI); an independent organization that analyzes industry data.
Using data on the severity and frequency of claims within a specific industry, NCCI categorizes different jobs into class codes that represent the level of risk* associated with the industry/occupation it is assigned to.
*When we are taking about workers compensation “risk”, we are referring to the likelihood of an employee being hurt while on the job.
Keep in mind; your workers compensation policy is a contract between you and the carrier. It says that they agree to pay for an employee’s work-related injuries, in exchange for your annual premium (more or less). It makes sense that premiums would generally increase as the chance of injury increases.
Class codes help carriers account for the variation in risk from one job to another, so they can calculate an appropriate premium.
To highlight this concept, let’s compare two very different occupations:
New Hampshire Workers’ Compensation Voluntary Market Rates for 2018:
Carpenter (5403): $9.01
Accountant (8803): $0.08
As you can see, the accountant will pay much less than the carpenter because the accountant is much less likely to suffer from an on the job injury (according to NCCI).
How does this apply to YOUR industry?
There are usually a variety of class codes that apply to the work performed in a given industry. You can find them all listed on the NH Insurance Department Website, where you can compare the qualifiers for different class codes, and the rate assigned to them. To get an idea of how this applies to you, search for any job that you pay an employee to do. Look at the definition and the “related” class codes. Do you think any of them apply to the scope of work done in your operation? Is the variation in rates between two class codes, what you would expect based on the variation in risk?
The formation of your worker’s compensation premium begins with determining which class code(s) is the best fit for your business. Therefore, it is important for you to know a little about how they work and more importantly, what class code accurately classifies the work your employees do. I’m a big fan of “trust but verify” and chances are you have been assigned the right code; however, it cannot hurt to have a conversation with your advisor to make sure this is true.
Keep an eye out for Part 2: Your Workers Compensation Modification Factor.
Jeff Reardon, AAI
Commercial Account Executive