Workers Comp Experience Rating 101

What Is Experience Rating?

• Method for modifying WC premiums
• Increases or decreases current year's premium based on past loss experience

What It Does

• Calculates what losses would have been expected for firm of that industry, size & state
• Compares that to actual losses

What It Does

• If actual losses were more than expected, employer pays premium surcharge
• If less than expected, employer gets premium discount

How It Works

• Calculated by the WC rating bureau in the state (i.e., NYCIRB)
• Based on payrolls & losses for last 3 years excluding the current year

How It Works

• Ex: Premium for Sept. 1, 2019 - Sept. 1, 2020 period
• Payroll & losses for Sept. 1, 2015 - Sept. 1, 2018

Payroll

• From reports the insurance carrier for that year sent to rating bureau
• Based on information the carrier obtained from auditing the employer's payroll records

Payroll

• All employers are assigned to one or more rating classifications
• The classification determines the premium rate the employer is charged

Premium Rate

• NYCIRB files "loss costs" with DFS
• Loss cost = cost losses plus claim handling expense

Premium Rate

• Every carrier files a "loss cost multiplier" with DFS
• Reflects carrier expenses and profit

Premium Rate

• Loss Cost multiplied by Loss Cost Multiplier

Premium

• Premium rate multiplied by payroll, divided by 100

Example

• Class code 8391, Automobile Repair Shop - All Operations & Drivers
• Loss Cost = 3.78
• LCM for Hartford Casualty Ins. Co. = 1.283
• Premium rate = 3.78 x 1.283 = 4.85

Example

• Payroll = $200,000
• Premium = 4.85 x $200,000/100
• Premium = $9,700

Experience Rating

• Applies "expected loss rate" factor to reported payroll divided by 100
• Result = expected losses
• ELR is based on classification
• Ex: ELR for code 8391 is 2.09

Experience Rating

• Ex: Payroll for code 8391 = $200,000
• Expected losses = 2.09 x $200,000/100
• Expected losses = $4,180

Experience Rating

• Formula weighs small losses more than large ones
• Small losses are more frequent
• Formula penalizes more heavily for frequent losses

Experience Rating

• Additional factors are applied to amounts of expected & actual losses to recognize frequency and to stabilize