INSURANCE
BY BERNARD K. QUINLAN, CPCU, CIC, CRM
Factors Affecting the Cost of Workers’ Compensation
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tate laws and construction contracts require subcontractors to carry workers’ compensation and employers’ liability insurance. However, subcontractors retain a significant degree of control over their insurance costs. In the long term, loss experience will be the most significant factor influencing the contractor’s cost of insurance. The most successful contractors carefully manage their loss exposures and insurance costs.
Classification System Insurance underwriters utilize approximately 600 classifications to group all employers, with 67 classifications applicable to the construction industry. Rates vary by classification, with higher rates applicable to more hazardous occupations. Workers’ compensation benefits vary by state, so the rate for plumbers or electricians in Massachusetts may be significantly different than the rate in neighboring states. In fact, Massachusetts rates are significantly lower than rates in other northeast states. Contractors should be cautious when bidding projects outside of Massachusetts.
Experience Rating A Massachusetts employer whose workers’ compensation premium averages $5,500 annually is subject to two experience rating factors; experience modification and All Risk Adjustment Program (ARAP). These actuarially calculated factors are benchmarks that measure a contractor’s loss history against the experience of other contractors engaged in the same trade(s) and operating in the same state(s). Contractors with better than average experience earn a premium credit, while contractors with worse than average loss history incur a premium penalty. A favorable experience modification indicates that the contractor strives to provide a safe workplace.
Experience Modification The experience modification is based on a firm’s payroll and losses during a three-year experience period. The experience period does not include the most recent policy period. For example, if an employer’s policy anniversary date is Jan. 1, the experience modification effective Jan. 1, 2013, is based on payroll and losses for Bernie Quinlan is a principal with Sullivan Group in Needham (www.sullivangroup.com). He can be reached at (781) 514-1331 or bquinlan@sullivangroup.com.
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Spring/Summer 2013
the 2011, 2010 and 2009 policies. Thus, a claim that occurred in December 2012 does not impact an employer’s premium on Jan. 1, 2013. The experience modification calculation is more negatively impacted by claim frequency rather than severity. In fact, claims exceeding $5,000 in value are limited, and only a portion of the actual claim is included in the calculation of the experience modification. The claim data includes paid amounts for both ongoing and closed claims, and reserves for future payments expected on active claims. A 1.00 experience modification is average, and has no impact on a contractor’s premium. A .92 experience modification indicates that the contractor’s loss experience is better than average, and results in an 8 percent premium credit. A 1.20 experience modification indicates that the contractor has incurred losses during the experience period, and a 20 percent additional premium is charged by the insurer.
All Risk Adjustment Program ARAP is calculated in conjunction with an employer’s experience modification and applies only on a surcharge basis. ARAP penalizes claim severity, as opposed to frequency. An ARAP surcharge can range from 1.01 to 1.25 maximum and may compound the impact of the experience modification. That is, a 1.20 experience modification combined with a 1.25 ARAP surcharge results in a 50 percent premium increase (1.20 x 1.25 = 1.50).
Impact on a Subcontractor’s Ability to Secure Work A debit experience modification and/or ARAP surcharge will negatively impact a contractor’s ability to be price-competitive. Additionally, general contractors and owners sometimes use experience rating as a bid qualifier! Given the choice between a subcontractor that demonstrates better than average loss history, and a subcontractor who has earned a debit (greater than 1.00) experience modification, the GC may elect to go with the “safer” subcontractor. What to do? •• First and foremost, prevent accidents from happening! Work with your insurance company, as well as your own project managers and foremen to provide the safest possible workplace. •• Consider pre-employment physical exams for all potential employees. •• Direct injured employees to Occupational Health