Lower Job Classifications Mean Lower Premiums

To keep their premiums at the lowest cost each year, it’s not unusual for businesses to seek job classifications with lower ratings. Workers’ Compensation guru, David Leng, explains in his book, Stop Being Frustrated and Overcharged Year After Year by Your Workers’ Compensation Program, this practice can actually backfire. He cites the case of a commercial building contractor that wanted to prevent an insurance company from adding a roofing classification to his policy. The roofing rate was double the other classes and with a 1.38 experience modifier, the contractor’s premium would have gone up 38.1%. Since the Experience Mod is computed based on three complete years of loss data ending one year prior to the effective date of the rating period, this would have a negative impact for four years and he felt it would put him out of business.

Leng analyzed the situation and found the contractor had been doing roofs for a number of years, so it was highly unlikely the insurance company would change its position. Therefore, he pursued another route – asking the rating bureau to have the experience modifier recalculated to take advantage of the higher expected losses. It was critical to have this applied retroactively to prevent the significant increase in premium. When the contractor provided the payroll for the past four years adjusting for the roofing classification, it was determined that the experience modifier would have been close to 0.85 rather than 1.38.

Leng uses the analogy of a playground seesaw: claims on one end and expected losses on the other. “By having the payroll placed in an incorrect and ‘lighter’ classification, it made the expected losses ‘lighter,’ which had the negative effect of causing the contractor’s actual losses to appear to be ‘heavier’ or worse than they actually were and to go ‘out of balance’ and end up over 1.00.”

The result: they were able to work with the state bureau and insurance company and redo past audits, without any additional premium owed. And the modifier was recalculated to 0.844 going forward. The company was in a much more competitive position and had one of its most profitable years. Additionally, the premium with the roofing classification was less than 2.5% higher than it would have been without the roofing classification and the higher experience modifier.

Lesson learned: The premium is all about claim costs and your modifier will balance out things in the end.