Workers’ compensation insurance premiums are not an inconsequential expense. In fact, it may be one of the higher-cost line items for a company. Depending on the size of the company, insurance premiums for workers’ comp may range from $30,000 a year to well over $1 million.
To insulate themselves from the financial risks of workers’ comp losses, companies throughout the United States typically buy workers’ comp insurance. In many of the states the insurance is mandatory. Most states individually govern the pricing of insurance by providing their own series of employee and classification codes. These codes are designed to account for risk. For instance, a company that employs machinists is deemed to be at greater risk of employee injury then a company that employs telemarketers. The former will pay higher insurance premiums to cover that risk then the latter will.
There are over 700 company classification codes and many more employee classification codes. Employee classification codes and rate modification designations are often hard to understand, and the assignment of a wrong code to a company may be costly.
Here’s an example: A plastic injection molder with 200 employees may have many different classification codes. In New York, for example, an employee involved in the production of plastic sheets, rods or tubes may be classified as 4452. Employees involved in the compression or injection of plastics may be classified as 4475 and those in plastic assembly as 4476. Why does it matter?
The insurance carriers that provide workers’ comp insurance use the codes to track losses. Their data may suggest that employees working under code 4452 are more inclined to get hurt than code 4476, and therefore the workers’ comp claims for 4452 would be higher.
To offset the higher risk of code 4452, the workers’ comp premium is calculated at $7.45 per $100.00 of payroll. The lower risk code 4476 is only $6.05 per $100.00 of payroll. The code for a clerical worker at that same plastic company is 8742 or 43 cents per $100.00 of payroll.
If an employee is misclassified, however, the rate differential is significant and you may end up overpaying. Let’s say you’re a New York employer, have 75 employees, each one making $35,000 per year under the classification code 4452. The annual payroll for that group is thus $2,625,000. The workers’ comp premium would be $195,562 per year.
You know that 35 of those employees are really assemblers and therefore should be in the classification code 4476. Your revised premium would be $177,187, or a savings of $18,375. That is a significant difference, and the difference is compounded yearly. If errors are found, the law provides a three-year look back. That would mean a refund in excess of $50,000.
Companies are also assigned classification codes that govern workers’ comp premiums. A company that manufacturers kitchen cabinets, for instance, will have a classification code that requires higher premiums than a company that extrudes modeling.
What should finance chiefs and risk managers do to make sure their companies’ workers’ comp premiums are no higher than they should be?
First, find the proper classification codes at the National Council on Compensation Insurance website or the relevant state workers’ comp rating bureaus. The NCCI gathers data, analyzes industry trends and prepares objective insurance rates and loss cost recommendations. They provide the manuals that practitioners and large companies depend on. You can also check with your state’s workers’ comp rating board for further guidance on risk classification.
You should start with a general understanding of the classifications. You can find the codes pertaining to your company on your current policy. Pay attention to the rate change dates. New ratings are generated from the state rating bureaus several times a year.
Once you understand the classifications, you can begin to dig into the policy. A spreadsheet with a list of employees and corresponding codes will be helpful. Remember to look at the multiple sub-classifications: All machine operators are not coded the same, for instance. The rates may be significantly different. A machinist on the floor of the factory full time is different from a machine operator working at a control center away from the factory floor.
Now that your worksheet is complete, you should prepare a letter to the insurance carrier indicating the errors. Most frequently, carriers will make the adjustments, resulting in lower premiums. If they deny the changes and you still feel strongly, you can appeal to the state workers’ comp-rating bureau.
It’s important to note that the insurance carrier providing the workers’ comp coverage is also interested in making sure it’s charging enough to meet its cost and turn a profit. Typically, the insurer will audit your company-classification codes and employee-classification codes to make sure it’s accounting for all of the risk. The Ward Group’s recently published Premium Audit Practice Study would suggest that carrier’s frequency of audits might lead to higher premium dollars collected.
CFOs and risk managers should understand workers’ comp audit practices to prevent the carrier’s audit representative from assigning the wrong codes. A firm grasp of the codes and how they work may help a company save as much as $100,000 in premium outlays.
Greg Walker is chief operating officer of SMP Consulting Group, a workers’ comp audit practioner.