Workers compensation premiums

Our numerical simulations and the econometric research we reviewed also make us conclude that workers compensation insurance encourages workplace safety. Because increased workplace injuries raise a firm s insurance premiums workers compensation acts as a tax on injuries. As with any tax employers can limit payments by reducing the activity taxed. If the cost of purchasing WC falls more than the cost of new safety equipment or safety education programs then the firm will pay more attention to workplace safety. WTien strongly experience rated workers compensation insurance leads firms to the cost-benefit calculations necessary for cost effective safety expenditures. 

Common measures for a safety program s performance are insurance expenses and losses. A cost that is often tracked by safety professionals is the organization s worker compensation premiums. Workers compensation premiums can be calculated in a number of different ways. However, regardless of the method for determining premiums, they provide an excellent indicator for safety performance in the workplace. 

Payroll Charges This item includes workers compensation, social security premiums, unemployment taxes, paid vacations, holidays, and some part of health and dental insurance premiums. The figure has steadily declined from 1980 and now is 30 to 40 percent of operating labor plus supervision expenses. 

Arnould, Richard J. and Len M. Nichols. 1983. Wage-Risk Premiums and Workers Compensation A Refinement of Estimates of Compensating Wage Differentials. Journal of Political Economy. March 332-40. 

Colorado has a program that allows firms to adopt basic injury and illness prevention program components in return for a workers compensation premium reduction. The cumulative annual reduction in accidents was 23 percent and the cumulative reduction in accident costs was between 58 and 62 percent. 

OSHA believes that adoption of injury and illness prevention programs based on simple, sound, proven principles will help millions of U.S. businesses improve their compliance with existing laws and regulations, decrease the incidence of workplace injuries and illnesses, reduce costs (including significant reductions in workers compensation premiums) and enhance their overall business operations. 

In an analysis of 117 California firms, Hakala (1994) reports that workers compensation experience modification fell as the degree of employee ownership increased. However, a firm s experience modification—an adjustment in its premiums according to whether the firm s losses are above or below the mean level in its risk class—depends on a firm s risk classification, making interclassification comparisons tenuous. Since the number of firm-level control variables is minimal in Hakala s research (as it is in Rooney s [1992] research), the findings need to be interpreted with caution. 

Traditionally, industrial ergonomics has been primarily a health and safety issue. This process driver remains, as Workers Compensation and health insurance premiums have risen sharply in recent years. For many employers, MSDs account for 60% or more of their total Workers Compensation bill. This financial hemorrhaging has increased awareness of the problem, and safety professionals have been asked to focus efforts on reducing these disproportionately expensive cases. 

A company s injury history, both the frequency and severity of injuries, is one of the factors determining their workers compensation insurance premiums. Having a revamped safety program will drive down injury rates and, in turn, insurance premiums. But, that is only one of the costs associated with workplace injuries. Others include medical expenses for treatment of the injured and lost productivity. Below are some rather startling findings from a PBS Frontline program based on a University of Michigan Press publication, which examined workplace injury statistics for 1992. 

Workers compensation—Rates for your workers compensation premiums might he impacted if personal injuries are involved in the accident. 

Loss of revenue (driver capacitv) Effect on workers compensation premiums ... 

Unlike other t3q)es of insmance, workers compensation insurance is one of the few that you can influence directly. You can significantly reduce the insurance premiums by having a safe workplace. 

The financial beneficiaries of WC and OSHA also differ. With WC the insurance premiums help compensate either injured workers or their families, whereas with OSHA the revenues collected help defray other government expenses. 

To investigate the impact of workers compensation insurance we used a method identical to that described for investigating the impact of OSHA enforcement activities. Specifically, we first numerically simulated hedonic labor market equilibrium at four rates of income replacement (0.5, 0.8, 1.0, and 1.5) assuming no experience rating of WC premiums and no safety and health standards and then calculated changes caused by increasing WC benefits from the usual 0.50 rate of income replacement. To examine the interaction between OSHA and WC we varied the average fine for safety and health violations from 0... 

The major finding to emerge from our simulations in Chapter 4 is that the degree of experience rating of workers compensation premiums influences both the direction of the effect of WC benefits on workplace safety and the interface between the OSHA and WC programs. If insurance providers were to experience rate WC premiums perfectly then WC would dramatically reduce workplace injuries, and OSHA and WC would strongly complement each other in enhancing workplace safety. 

Firms choose the combination of workers, capital, and expenditures on workplace safety that maximize their expected profits. When deciding how much to spend on safety enhancing measures employers consider the possible economic benefits of a safer workplace, such as greater output, lower pay for their workers, and lower workers compensation insurance premiums. To keep our simulations with a multiplicity of injury classes simple we again followed the assiunption of our earlier chapters in having firms choose the level of a generic device, safety equipment, that represents all safety enhancing expenditure firms make. A firm s expected profit then depends on the price of its product and its choices of safety equipment, capital, and its (effective) number of workers, tig, which is less than its total labor force, n. ... 

A typical relationship in states workers compensation insurance programs is that a 50 percent reduction in WC injury costs produces no change in WC costs for a firm with seven workers, a five percent reduction in the WC costs for a firm with 10 workers, a 17 percent reduction in the WC costs for a firm with 75 workers, a 36 percent decline for a firm with 750 workers, and a 50 percent (dollar-for-dollar) decline in WC costs for a firm with 1750 or more workers (Chelius and Smith, 1987). Premium changes also take four years to take full effect. Because small firms insurance prices do not fall much if they improve their safety small firms safety incentives under WC are limited, and small firms have little reason to contest the severity or genuineness of their workers WC claims. 

One could debate whether existing compensation laws achieve their goals. For example, some thought that employers would become more interested in safety by becoming responsible for indemnification of injured workers. However, the competition among insurance companies for employers business may have done as much to increase employer interest in safety. Many insurance companies selling workers compensation insurance provide loss control services to employers. Preventing work-related accidents helps employers reduce claims and lower insurance premiums. 

Employee payroll forms the basis for workers compensation insurance premiums Units for premiums are dollars per 100 of payroll. Average costs are about 2.00 per 100 of payroll, but vary widely with employment type. 

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