Reduce Your Workers’ Compensation Premium
Experience Modification Rate
To gain a better understanding of the financial consequences these events cause, you need to know what it takes for a business to generate the additional cash flow, and where the money comes from to pay for these unexpected financial losses.
Consider these scenarios and their financial consequences:
Case 1 – Regulatory Action: Consider a Missouri business that failed to secure proper workers compensation coverage. They incur a state imposed penalty of $50,000. This business operates on a profit margin of 20%. The business would have to generate additional gross revenue of $250,000 to cover the financial loss due to the imposed penalty. Of course this does not consider the potential criminal charges which may be levied on the business owner.
Case 2 – Policy Related Issues – Classification Codes: Consider a business owner has secured a workers compensation policy. The agent mistakenly misclassified the business operation using a class code that carried a rate of $14 per 100 of remuneration. The projected rating payroll for this business was determined to be $200,000. The premium calculated out to be $28,000. In fact the proper class code carried a rate of $8 per 100 of remuneration and the correct premium should have been $16,000. The difference in premium was $12,000. Now consider this business operates on a profit margin of 10%. That means this business would have to generate additional gross revenue of $120,000 just to break even on the mistake this misclassification caused.
Case 3 – Policy Related Issued – Audit: Consider this business completed their workers compensation audit. At the time of the audit the auditor discovered an error in the original classification of the business. The correction entailed moving a great deal of the business rating payroll from a class code that carried a rate of $12 per 100 of remuneration to a code that carried a rate of $37 per 100 of rating payroll. The business also had an anticipated growth in work causing a 40% increase in payroll causing their payroll to increase from $300,000 to $420,000. There were no corrections to the original policy during the policy period that would reflect this increase in payroll or change in classification. The premium increased from $36,000 to $155,400 generating an additional premium charge of $119,400. Now consider this business operates on a profit margin of 10%. That means this business would have to generate additional gross revenue of $1,194,000 to recover from the unexpected additional premium charge at audit.
Case 4 – Experience Modification Rate: Consider the example outlined above where the business provided service to manufacturing and industrial clients. Part of the contract they have with their clients is that they must maintain an EMR or 1.0 or below in order to continue work. Because of a misclassification of the business (wrong class codes) and a few claims, the EMR increased to 1.10. They were ordered off the work sites. The business just lost $5,000,000 in contract work.
Case 5 – Subcontractor Issues: Consider the example provided above where the business hired an uninsured subcontractor to help with a job. To recap, the business paid the subcontractor $500,000 and hoped to make a profit of $75,000 off the work. Unknown to the business the subcontractor did not carry workers compensation insurance. At audit the insurance company picked up the additional $500,000 in uninsured subcontract costs and charged that against the business. The additional premium charge was $125,000. Not only did the business lose the $75,000 they thought they would make on the extra work but at a %20 profit margin they would have to generate an additional $625,000 in gross revenue to offset having to pay the $125,000 additional premium.