William C. Reynolds, ARM, CPCU, CEBS
The calculation of your workers compensation premium is more than merely multiplying estimated payroll numbers by rates. As this article will reveal, there are several factors that affect your workers compensation premium and many, if not properly evaluated and validated, can cost your company a tremendous amount of additional premium.
Beware: The Poor Quality Control Can Cost You Thousands Of Dollars!
Believe it or not, over 60% of the time your workers compensation is issued in correctly, resulting in substantial overcharges. It has been our experience that the following are the main sources of these errors.
1. There are errors made in the initial classification of your business. Your workers compensation rates are based upon classification codes that, in turn, are determined by the insurance industry. The rules and regulations regarding the assignment of classification codes in very complex. To make matters worse, as your operation changes your classification code may change as well. Because most insurance agents are not trained in the art of understanding this web of regulations, may workers compensation policies are misclassified, resulting in premium surcharges.
2. There are countless errors in the calculation of your experience modification. Probably the most confusing aspect of workers compensation rating is the experience modification factor. Behind this factor, which has a direct impact on your insurance premiums, is a myriad of calculations that are based upon your loss experience, classification codes, audited payrolls, just to name a few. To make things worse, an error in your experience modification stays with you for three years!!
3. There are errors in the determination of your audit premium. Unfortunately, many insurance company premium auditors are under tremendous pressure to audit as many insureds as possible. On top of that they are poorly trained in the nuances of the workers compensation audit manual. As a result, payrolls are often reported incorrectly. They either are overstated, not limited by legitimate audit rules, or misclassified. Either way you pick up the tab.
4. The entire system is based upon a method of reporting data that almost guarantees mistakes. There are many reasons for this. First is simply the "human element" – people making mistakes. Then there is the "garbage in – garbage out" scenario. On top of that there are timing issues with reporting the data to the bureau that calculates the experience modification, and NO ONE IS PERFORMING A QUALITY CONTROL CHECK!!
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Source: CompEraser, Inc.