Workers Comp is one of the easier insurance products to understand from a pricing standpoint. Pricing can be expressed as a formula:
Rate X’s Payroll =’s Premium
In New Jersey, rates are controlled and published by a central Compensation rating and inspection bureau. Results for employers with similar operations across the state are compiled and a rate is ‘published’ for that classification of work. For small employers that’s about all there is to understanding rates.
Everyone starts out paying 100% of the published rate for their classification. Once a 3 year claim history is complied for an individual employer, the “Bureau” will publish and ‘Experience Modification’ factor that applies for your individual account. That can be expressed as a formula:
3 Year Losses vs 3 Year Premium =’s Experience Mod
That modification factor is adjusted up or down over the next year depending on your claims experience and the ‘Life Cycle’ of a claim is 3 years. Translation: Claims will effect you for 3 years AFTER they happen.
Claims have several components including medical expense, lost wages, disability settlements (partial or total, temporary or permanent) and expenses.
Clearly, controlling costs requires control of claims. BUT… the control comes from Claim Prevention. Once an employee is injured, you are obligated by law to report the claim to your insurance carrier.
After the claim, diligent monitoring of the claims process and having an early return to work program are key to controlling cost.