Lower Workers Comp Rates .com

Control Costs - Safety Programs - Common Injuries - Best Practices

"Providing the Means to Lower Workers Compensation Rates"

Workers' Compensation Insurance

Glossary of Insurance Terms

Secondary Glossary of Terms

Advisory Organization: The new designation for what were formerly known as Rating Bureaus (such as the NCCI). This new term, recently coined by the National Association of Insurance Commissioners, is meant to reflect more accurately the role of NCCI and other such organizations (like Insurance Services Office) which compile rating data and file policy forms for use by member insurance companies.

A.L.E.: Allocated Loss Expenses, which are insurance company costs for adjusting and settling claims which can be identified with a specific claim. The A.L.E. are often then included in the claims costs used to adjust premium in some loss-sensitive premium adjustment types of Workers' Comp policies, such as sliding scale dividend plans or some Retro or Retention plans.

ARAP: Assigned Risk Adjustment Program--An additional adjustment to the Experience Modification Factor, used in some states to adjust premium for Assigned Risk policies. Although NCCI includes this adjustment on all their Mod worksheets, not all states use the ARAP program. Illinois, for instance, charges higher rates for Assigned Risk policies, and thus does not use the ARAP adjustment to the Experience Mod.

Assigned Risk Plan: Sometimes called the Pool, this is a mechanism established by individual states to make sure that employers can obtain workers' compensation insurance even if insurance companies are not willing to write such insurance on a voluntary basis. Assigned Risk plans in many states carry higher rates than the voluntary market.

Audited Premium: The final premium for the policy term, produced by auditing actual payroll exposures.

Audit Workpapers: Worksheet prepared by the premium auditor, can be either hand-written or computerized, showing how the auditor arrived at the payroll numbers that are used to determine the audited premium.

Direct Writer: An insurance company that does not work through independent insurance agents. The largest direct writer of Workers' Compensation insurance is Liberty Mutual. Agents for direct writers are employees of the insurance company.

Dividend: A return of premium, calculated after policy expiration, based on the over-all performance of the insurance company or of a group of insureds. Dividends cannot be guaranteed in advance, although they are often shown on proposals for insurance.

Employers' Liability: Section B of the standard Workers' Compensation insurance policy, this is the part of the policy that has a dollar limit shown for the coverage. This section insures employers for liability towards employees that is not covered by the statutory Workers' Compensation provisions of the state (which are insured in Section A and have no set dollar limit on the policy).

Excess Losses: In the Experience Modification Factor, the amount of any single claim that exceeds $5,000.

Experience Modification Factor: An adjustment to Manual Premium, calculated by an advisory organization (also known as rating bureaus) such as NCCI, based on historic loss and payroll data of a particular insured.

Experience Period: The window of time from which loss and payroll data is used to calculate an experience modification factor for an employer. Normally this window is a three year period, starting four years prior to the effective date of the experience modifier. However, rating bureaus do not wait until three full years of data are in the experience period before producing an experience rating for an employer. If an employer reaches a certain, relatively low threshold of workers' compensation insurance premiums in any one of the three years in the experience period "window", this will make that employer eligible for experience rating.

Fronting: An arrangement between two insurance companies to produce an insurance policy (usually workers' compensation) for a third party wherein one insurance company produces the official policy (for a fee) but cedes all losses from that policy to the other insurer. This kind of arrangement is used in situations where the insurer writing the risk is not an admitted company in a particular state, and the coverage needs to be written by an admitted carrier. In order to meet the statutory requirements, the first insurer pays a second (admitted) insurer to "front" the policy, even though the first insurer remains responsible for paying all losses arising under the policy. This kind of arrangement is often used by captive insurers when they are not admitted carriers in a particular state.

Governing Classification: The classification code on an employer's workers' compensation insurance policy that generates the most payroll aside from standard exception classifications such as clerical or outside sales (unless there is no other workplace classification applicable other than a standard exception).

Guaranteed Cost: A Workers' Compensation insurance policy that is not subject to adjustment due to losses that occur during the policy term. In a Guaranteed Cost policy, the only variable affecting premium that should change between policy inception and audit is payroll. This is in contrast to the various kinds of Loss Sensitive plans, such as Retrospective Rating, Retention Plans, or Sliding Scale Dividend Plans, where there is a premium adjustment made based on losses incurred during the policy term.

Incurred Losses: Paid losses plus loss reserves for estimated future claims costs. Many loss sensitive insurance policies adjust premium based on incurred losses rather than just on paid losses.

Interstate Rating: An experience modification factor that applies across more than one state. Interstate ratings are calculated by NCCI for employers whose past workers compensation insurance policies show payroll in more than one state. Most, but not all states, participate in the interstate rating system. A few states, such as Michigan, Pennsylvania, and Delaware, do not participate in interstate rating, but instead continue to calculate separate experience ratings for employers who operate in their jurisdictions, even if those employers also qualify for interstate rating. Those employers thus have one experience modifier applying to their operations in most states but a separate modifier calculated by the stand-alone state rating bureau. The separate stand-alone mod would apply only to workers compensation insurance premiums developed for the employer's operations in that stand-alone state.

Manual Premium: Workers' Compensation premium calculated by multiplying payrolls by appropriate rates, before application of Experience Modifier, Schedule Credit, or Premium Discount.

Medical-Only Claims: Claims for which the only cost is medical care, without any lost-time benefits being paid.

Modified Premium: Workers' Compensation premium calculated after application of Experience Modification Factor. Similar to Standard Premium, but does not reflect any Schedule Credits or Debits.

NCCI: The National Council on Compensation Insurance--the organization responsible in many states for determining proper Workers' Compensation classifications, Experience Modification Factors, and collecting data used for ratemaking. NCCI also writes the manuals used in many states to calculate Workers' Compensation premiums, and also administers the Assigned Risk Plan in many jurisdictions. NCCI is a private organization, not connected with government, although it is often mistakenly thought to be a governmental agency.

Premium Auditor: A harmless drudge (with apologies to Samuel Johnson and auditors everywhere-- just kidding!) The premium auditor determines actual exposure (remuneration) for a policy period, in order to determine the final audited premium. The auditor typically works either directly for the insurance company, or for a third-party company retained by the insurance company.

Premium Discount: A premium credit, based on size of the premium paid. It is normally given automatically on voluntary market policies, although Retrospective Rating or Sliding Scale Dividend policies usually do not have a Premium Discount.

Primary Losses: In the Experience Modification Factor, the first $5,000 of any single loss.

Rating Bureau: See NCCI. Some states maintain their own separate rating bureau, although these often follow NCCI rules and use NCCI manuals. Currently, the states of California, Delaware, Hawaii, Indiana, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, Pennsylvania, Texas, and Wyoming operate their own non-NCCI rating bureaus. Many of these largely follow NCCI rules for computing premiums and classifications, but California, Delaware, Texas, and Pennsylvania are notably different than NCCI in some aspects of classification and premium computation.

Remuneration: The basis for calculating Workers' Compensation premium. Remuneration is primarily payroll, but may also include other forms of employee compensation. Workers' Compensation premium is computed by applying varying rates (for different classifications) (per hundred dollars of remuneration).

Residual Market: Workers' Comp. written through an Assigned Risk Plan.

Retrospective Rating: A Workers' Compensation insurance policy that makes a subsequent adjustment to premium, after policy expiration, based on losses generated during the policy period. The adjustment can go up or down, within set parameters, based on the losses generated during the policy period.

Retention Plan: Similar to Retrospective rating, this is a Workers' Compensation policy format that adjusts the premium, up or down, based on losses (and associated costs) that occur during the policy period.

Schedule Credit/Debit: A discretionary premium adjustment based on underwriters evaluation of special characteristics of a risk not reflected in the Experience Modifier.

Scopes Manual: Manual produced by NCCI which details what kinds of workplace exposures belong in particular Workers' Compensation classification codes.

Sliding Scale Dividend: A return of premium, after policy expiration, based on the actual loss experience of the insured business. The size of the dividend varies with the actual loss ratio of the insured business.

Short Rate Penalty: A penalty applied by insurers when a Workers' Compensation insurance policy is cancelled by the insured before the expiration date of the policy. This penalty is steep in the early days of the policy, and gradually tapers off the closer the policy gets to the expiration date.

Standard Exception: Classifications which are normally not included in the governing classification. These are clerical, outside sales, and often (but not always) drivers.

Standard Premium: Premium after application of Experience Modifier and Schedule Credit or Debit, but before Premium Discount.

Voluntary Compensation: An endorsement to the standard Workers' Compensation insurance policy which extends coverage to employees not required to be covered under the state's statutory Workers' Compensation provisions.

Voluntary Market: Workers' Compensation insurance written outside of the Assigned Risk Plan.

Bookmark Lower Workers Comp Rates Right Now