Remember when you couldn’t wait to turn 16 and obtain the freedom that comes with a driver’s license? Then the anticipation of turning 18, becoming an adult and being able to vote. And having your first cocktail at 21. For me, the next hugely anticipated milestone was 25 – the age when my car insurance premiums would go down!
Okay, maybe that was just me.
So, why am I talking about car insurance? Well, it’s because most people understand car insurance. We know, for example, that a 16‐year‐old boy driving a sports car typically pays higher premiums than a middle‐aged married woman in a minivan, right? Statistically, teenage boys are more likely to cause accidents, report claims, and cost insurers more money than middle‐aged women. As a result, their premiums are higher. This is how insurance works: the greater the loss potential, the higher the premium.
For auto insurance, determining the level of risk is fairly simple; an insurance carrier looks at stable factors such as age and gender. Determining premium for other insurance, such as workers compensation insurance, is based on factors that can fluctuate from year to year, and therefore requires more detailed information to calculate. Also, loss exposure for workers compensation policies varies substantially from business to business. A standard premium rate would not appropriately reflect every business’s actual exposure to loss.
Calculating Premium
Consider a workers compensation policy. Premium is based on factors such as the operations of the business, employee duties, and employee wages – and policy premium is calculated by using the insurance rate and exposure units. The insurance rate for workers compensation policies is based on the type of work that employees do. Dangerous jobs can have much higher rates than safer jobs; these higher rates account for the difference in injury potential.
Insurance Rate
How much variation exists in rates? In our home state of Wisconsin, for example, the rate for an employee who does roofing work is currently 107 times higher than the rate for an employee who works at an insurance company.
Each of the approximately 550 workers compensation classification codes has its own rate set by the state rating bureaus. The task for the insurance carrier is to determine the correct classification code (insurance rate) to apply to employees’ wages. This is done by interviewing business owners, touring their premises, and applying classification rules and procedures.
Exposure Unit
For workers compensation policies, payroll is used as the exposure base. When a policy is first written or renewed, the business owner estimates their employee payroll for the upcoming year. That estimate is then multiplied by the rate to arrive at the premium that will be due over the next 12 months.
Ensuring Accurate Premiums
After a policy period expires, premium audits are conducted to make sure that a business is only paying the premium they truly owe rather than a premium based on estimated figures. This could mean an increase in premium if information was missing or actual payroll or sales figures were higher than original estimates. But it could also mean a refund if those figures were less than the estimated amounts. Learn more here: “Insurance Cost: Understanding Premium Audits.”
To find out how Society can help your business reach new heights, visit societyinsurance.com to request a quote from your local independent agent.
