When you look at a workers’ compensation quotation or rating page, the number of credits and surcharges can be overwhelming. Experience mod credit, scheduled credit, contractors credit, terrorism, increased limits factors, the list goes on. All these line items affect how much you are paying for workers’ compensation, directly impacting the class code (or base) rates the carrier is using. What makes it even more confusing, is that many of these rates (including the base rates themselves) are completely up to the discretion of the underwriter.
How then, do you know if you’re getting a good deal?
How can you compare quotes from different competitors, or from one year to the next when your payrolls may have changed over time.
The answer is easy – calculate your net rates.
Now with all the aforementioned factors we’ve discussed, the math needed to try to determine your net rates may seem daunting. But there’s an incredibly simple way to bypass all of these calculations and come up with your net rates, and I promise, we’ll do it with two basic calculations only. The first calculation will give us what I call our “rate modification factor.” This factor sums all the various schedule credits, debits and surcharges found on a policy and boil it down into one number based on one calculation. Let’s do that now.
This first calculation is done by taking our “final” or “total” net premium and dividing it by our “manual” or “subtotal” premium. The “net” premium is always found at or near the bottom, and in this example, that number is $343,493. The “manual” premium is usually found just after the listing of class codes, and before any other calculations have taken place. By definition, the manual premium is a total of all the codes’ base premiums added up together. In this example, that number is $878,770. If we divide $343,493 by $878,770 we get 0.3909.
Effectively, this means that this insured is only paying 39.09% of their manual premium. We can now take this rate modification factor and start multiplying our base rates by this. Let’s focus on code 5537 as this is where the bulk of the payroll and premium is coming from. A base rate of $10.94 multiplied by the factor of 0.3909 yields a net rate of $4.28. How cool is that? Using two simple calculations, we’ve just uncovered our true costs for workers’ compensation. This two-step process bypasses a dozen or more calculations and is incredibly helpful for comparing true cost from one year to the next, and from one competitor to the next.
Additional questions? Ask us.
ABOUT THE AUTHOR
Blake Croson is a Vice President at Assurance bringing more than 10 years’ insurance experience. Blake’s expertise is in property and casualty insurance for construction companies, and he focuses on providing consultative risk management and insurance solutions that lower the cost of insurance and minimize risk. Blake received his Bachelor of Arts degree in Political Science from the University of Illinois at Chicago. He also earned the following designations: Associate in Risk Management (ARM), Construction Risk Insurance Specialist (CRIS), Associate in Insurance Services (AIS) and Chartered Property Casualty Underwriter (CPCU).