Workers compensation experience rating

In workers compensation experience rating, the actual characteristics of the individual employer are determined over a period of time, usually three years. This experience is then compared with the average as reflected by the manual rate or rates which apply to the employer s business. If the employer has lower than average costs, then a comparable rate credit is awarded, while for a higher than average experience, a debit rate is applied. 

The actuarial premises on which the workers compensation experience rating system was developed give credibility to OSHA incident recordable and lost workday case rates as measures, and predictors, of safety performance, with these qualifications The statistical base (the hours worked) on which the records are developed has to be large enough and low probability-severe outcome risks may not be encompassed within the experience base. 

Safety professionals should also be aware of the reality—managements usually set goals for improvement based on previous results. Historical measures to be discussed here—so-called lagging indicators—are OSHA rates, workers compensation costs, workers compensation experience rating, and control charts. 

Workers Compensation Experience Rating. 2004. National Council on Compensation Insurance, Inc., 2004. Available at http //www.ncci.com/media/ pdf/abc Exp Rating.pdf. 

The workers compensation experience modification rating system is based on actuarial science. In an undated publication titled The ABC S of Experience Rating issued by the National Council on Compensation Insurance, these statements appear. 

Experience rating is mandatory for all employers who buy workers compensation insurance from insurance companies. For those employers, experience rating is one of the historical performance measures that can be used, cautiously, as an indicator of the quality of safety in place. Self-insured companies would not have workers compensation experience modifications. 

Using selected data such as reduction of the total case incident rate (TCIR), or workers compensation experience modification rate (EMR), etc. does not add value to an organization, as described in Lesson Learned 3. 

The employer usually pays the costs of workers compensation as a percentage of the payroll. It is common that the premiums are adjusted so that expenditures and revenues are equalised over time, but partial subsidy by government also occurs. The premium is usually established for each class of industrial activity based on historical data on expenditures for compensation. Experience rating is also practised, meaning that the premium to be paid by an employer is adjusted, based on previous experience with that employer. Some insurance companies also give premium incentives for improvements in the SHE standard and in the SHE management system made by the employer. 

Prequalification and selection can range from a simple review of performance data to a comprehensive review of both performance and safety programs. The simplest approach is to request the company s workers compensation Experience Modification Rating (EMR) issued by the company s insurer for the last 3 to 5 years. An EMR of 1.0 is the average for the industry 0.5 is half the industry average, and 2.0 is twice the industry average. More extensive safety information submittals may include any of the examples outlined in Table 5-1. 

Provide employee accident experience for the past 5 years, including the current year. The submittal shall specifically include OSHA recordable cases rate, lost and restricted workday cases rate, vehicle accident rate, and number of fatalities with a description of each. The workers compensation interstate experience modification rate should be less than 1.0, and applicable SIC codes should be noted. 

Workers compensation is Just such a system. It provides mandatory no-fault disability and death coverage for injuries and, to a lesser extent, illnesses arising on the job, financed entirely by employer contributions. To the extent that it is experience-rated, each employer s payment into the system is equal to the anticipated claims of his or her workers (tt c). All of the provisions of workers compensation are well-known in particular, workers can know with a high degree of certainty with what likelihood and to what extent they will be compensated in the event of an accident on the job. Thus the conventional economic view, predicated on the market determination of wages and working conditions, predicts that neither employers nor workers should care one way or another about the existence of the workers compensation system or the benefits it provides. 

Source OSHA Directorate of Standards and Guidance. States define "hazardous" employers individually, using criteria such as above-average injury incidence rates for their industry or above-average workers compensation claim experience. ... 

Knowledge as to a contractor s performance can be provided by their insurance company. They calculate an experience modification rate (EMR) for the previous 3 years. It is the ratio of the Actual Workers Compensation Losses to the Expected Workers Compensation Losses. ... 

What does all this mean Actuaries have established that workers compensation claims costs, payrolls, and rates for an insured s occupational classes, over time, form a statistical base from which to compute expected claims experience. 

Do the OSHA statistics—the recordable case rate and the lost workday case rate —for an exposure of 1,000,000 hours have a confidence level of, say, 68.27%, as measures of the quality of safety performance An entity of this size would more than likely purchase workers compensation insurance and have an experience modification as an additional measure. 

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 National Commission on State Workmen s Compensation Laws recommended insurance providers experience rate WC premiums to the maximum extent feasible. Historically, WC insurers have not used the accident experience of a small establishment to determine the establishment s price of WC insurance. Instead, they have combined the injury statistics for all workers within an industrial class and determined a so-called manual rate for WC coverage. The product of each worker s wage rate and the manual rate for his or her industrial class summed over all workers determines the total WC insurance premium for a small firm. As firm size increases insurers pay less attention to the average experience of the industrial class (the manual rate) and more attention to the safety record of the individual firm. Experience rating of insurance policies refers to the process of adjusting insurance prices... 

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. 

The results in Tables 5-2 and 5-3 also reveal the implications of extreme changes in the basic parameters of the workers compensation system such as the degree of experience rating and the accuracy of state verification. Applications for claims are the most sensitive to extreme changes in the insurance program parameters with claims paid moderately sensitive, and injuries insensitive to either experience rating or accuracy of state verification. 

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. 

Ruser, J.W. (1985). "Workers Compensation Insurance, Experience-Rating, and Occupational Injuries," Rand Journal of Economics 16(4) 487-503. 

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