Understanding Workers' Compensation: Premium Calculation, and Audits
Workers' compensation is a crucial aspect of ensuring the well-being of employees in the workplace. It's a form of insurance that provides wage replacement and medical benefits to employees injured during the course of employment. This removes the need for the employee to sue their employer to receive the necessary compensation for injury-related expenses.
Premium Calculation:
Workers' compensation premiums are calculated based on various factors including the industry type, the size of the payroll, and the company's claims history. Insurance companies typically assess the level of risk associated with a particular industry and adjust premiums accordingly. The size of the payroll also plays a significant role since it determines the potential exposure an insurance provider faces in the event of a claim. Companies with higher payrolls generally pay higher premiums.
Moreover, a company's claims history, often referred to as an Experience Modifier (Experience Mod or Mod Factor), is a critical factor in premium calculation. The Experience Modifier adjusts the workers’ compensation premium based on the number and severity of losses to the business compared to what is considered average within the industry, location, and size of operation. If a company has a track record of frequent or severe workplace injuries, resulting in a higher Experience Modifier, it's deemed a higher risk and may face elevated premiums. Conversely, companies with a strong safety record that results in a lower Experience Modifier may qualify for reduced premiums as they pose less risk to the insurance provider.
Workers’ Compensation Audits:
An audit in the context of workers' compensation is a process where the insurance provider verifies the accuracy of the premium calculations. During an audit, the insurance company examines payroll records, job classifications, and other relevant documentation to ensure that the premium charged aligns with the actual exposure to risk. The audit may also involve a review of the company's safety protocols and compliance with state regulations regarding workplace safety.
The primary purpose of the audit is to ensure fairness and accuracy in premium calculations. By conducting audits, insurance providers can adjust premiums based on actual exposure to risk rather than relying solely on estimates. Audits also help identify any discrepancies or inaccuracies in payroll reporting, ensuring that companies pay the appropriate premiums based on their actual operations.
What Happens After a Workers’ Comp Audit:
Once the audit is completed, the insurance provider will reconcile any differences between the estimated premium and the actual exposure to risk. If the audit reveals that the company has underpaid premiums, the employer may be required to pay the additional amount owed. Conversely, if the audit shows that the company has overpaid premiums, the insurance provider may issue a refund or credit towards future premiums.
Additionally, the audit process provides an opportunity for the company to identify areas for improvement in its safety protocols and risk management practices. By addressing any deficiencies highlighted during the audit, companies can reduce the likelihood of workplace injuries and potentially lower their experience modifier, which could mean lower workers' compensation premiums in the future.
For more information on Workers’ Compensation, Audits, or to learn more about ways you can improve your experience modifier, please reach out to one of our knowledgeable agents.
