Workers’ comp turbulence Featured

7:00pm EDT February 23, 2010

After enjoying several years of decreasing workers’ compensation rates as a result of workers’ compensation reform, many companies are bracing for anticipated increases in their 2010 workers’ compensation premiums. Most companies agree that such increases could not come at a more difficult time with the current state of the economy. Nevertheless, it is difficult to dismiss the fact that the average cost of a serious claim in California has risen by more than 47 percent since 2005 to $57,164.

Smart Business spoke with Griff Griffith, CPA, CIC, a principal with GMGS Insurance Services, to make sense of the 2010 workers’ compensation rates.

What key things do business owners need to know about their workers’ compensation plan?

To begin, it is critical to understand that your workers’ compensation net rates are made up of four key components:

  • Pure premium rates (PPR)
  • Carrier PPR modifiers, premium discounts and scheduled credits
  • Experience modification factors (X-Mods)
  • California surcharges and CIGA assessments

The pure premium rate is that portion of your final rate (net rate) that is needed to pay expected losses. This rate is determined by the WCIRB and needs approval by the State Insurance Commissioner, Steve Poisner, and the California Department of Insurance (DOI). Pure premium rates do not take into account money needed for insurance company expenses or their profitability. Most recently, the pure premium rate has become less of a factor in determining your rates since Commissioner Poisner (contrary to recommendations of his own actuaries) has rejected the recommendations of the WCIRB to increase pure premium rates to compensate for rising claim costs.

As a declared candidate for California Governor, he has stated ‘There are costs that are going up, there’s no question about that... my work here is only advisory and insurance companies can price workers’ comp insurance any way they see fit.’ Politics aside, every insurance company starts with the same pure premium rates as the foundation of their base rates, so this component is simply a starting point for determining your net rates in 2010.

What about carrier PPR modifiers, premium discounts and scheduled credits?

Each carrier has its own pure premium rate modifier, which is applied to each of the pure premium rates to determine their base rates, the starting point of your premium. During the past year, we noted that most carriers increased their modifiers substantially. Carriers next apply premium discounts and credits, which are the discretionary tools used by the insurance companies to adjust (increase or decrease) their rates based on their appetite for your business. A competent insurance broker has the ability to help insurance companies determine what applicable discounts and credits should be applied on your behalf. If your broker functions like a true risk manager, he or she will know how to professionally persuade the insurance companies to allocate bigger discounts and scheduled credits resulting in lower bottom-line net rates.

What is the impact of the X-Mod formula?

The greatest source of confusion regarding workers’ compensation rates in 2010 centers on recent changes to the California Experience Rating Plan (ERP). Companies with premiums in excess of $16,299 can qualify for a premium multiplier called an experience modification factor, or X-Mod. This multiplier takes into account a company’s payroll and loss history (generally for three years) and compares them to companies with similar classification codes. Depending on your company’s loss history, the result is a multiplier, which adjusts your premium upward or downward. Historically, an X-Mod of 100 percent signified average results or that your company’s losses were equal to what the WCIRB forecasted your expected loss results to be based on your payroll and classification codes. However, with recent changes to the ERP formula, it casts some real doubt that this will be the case any longer.

The new X-Mod formula appears to only reward near perfection (relatively claim-free results). If a company has no losses it can benefit from the recent changes made in the experience rating plan. What was once deemed as average results is no longer the same, and there are many companies with losses even below the bureau’s ‘expected loss values’ that have 2010 X-Mods greater than 100 percent.

What is the best strategy for surviving in 2010 and beyond?

The best counsel we can provide is to ensure that your company has an effective risk management and safety program including the assistance of a claim specialist to help manage your claims through closure. Now more than ever, every single claim counts and frequency of claims must be addressed more aggressively. In order to survive these and future changes in the experience rating plan, you must understand the formula and how to succeed within the system.

The new X-Mod formula does reinforce the connection between safety and lower premiums, but this requires your employees’ buy-in and understanding of how workers’ compensation claims impact them personally. In some industries it is paramount that employees understand that if your company’s X-Mod exceeds 124 percent that you are disqualified from bidding certain types of work. No longer is workers’ compensation insurance just a cost of doing business; your X-Mod may be the primary determining factor in your company’s survival and the ability to secure future work.

Griff Griffith, CPA, CIC, is a principal with Garrett/Mosier/Griffith/Sistrunk Insurance Services. Reach him at (949) 559-3370 or