Workers’ compensation insurance protects employees from financial hardship after they suffer injury or illness on the job. It pays for direct medical expenses and wage replacement while the employee is unable to work due to the injury. In Massachusetts, all organizations that have employees are required to purchase it, whether they have just one part-time employee or if they have employees working in other states. (If you do have employees in several states, you may need to purchase additional coverage as laws vary among states.)
In Massachusetts, the Division of Industrial Accidents manages the workers’ comp system. It establishes codes for every job type and sets a corresponding base rate. Your company’s base premium is calculated by multiplying your payroll in a given class code by the state-set rate. This amount is then multiplied by your company’s actual claims experience to establish your premium.
The two factors that determine claims experience for businesses are frequency of claims, measured by the Experience Modification Factor (Mod), and severity of claims, measured by the All Risk Adjustment Program (ARAP). The claims history used to calculate these metrics is the three oldest of the prior four years. For example, a 2019 policy looks at claims experience for 2015, 2016 and 2017.
When you’re looking for a provider of workers’ compensation insurance, take these three factors into consideration:
1. Claims Management
Efficient claims handling keeps claim costs down and reduces any negative impact to your Mod and ARAP. Some providers offer guidance for developing a “return to work” program, which can help an injured employee return quicker. For instance, an employer may have or may create a position with less rigorous physical requirements to allow an employee to return earlier. This helps reduce claim costs. Choosing a provider that offers such assistance can be valuable.
Some insurance companies offer a scheduled deviation from the state set workers’ comp rates, which provides a guaranteed discount for the policy period. Other companies may offer a dividend plan, through which the claims experience and discount amount are calculated when the policy year is over. Such dividends are not guaranteed and are generally based on the individual’s experience as well as the overall performance of all policyholders participating in the dividend plan.
3. Proper Classifications
Using proper job classifications for your workforce is essential. While overpaying due to wrong class codes is always a concern, underpaying can be equally problematic since an audit may result in a large premium adjustment. Working with a knowledgeable agent helps you avoid problems. Policies are audited at the end of each policy term, and a premium charge or credit is made if actual payrolls differ from the estimates used to calculate the original premium.
Workers’ comp and other insurance policies are only one component of a complete enterprise risk management program. The best advice is to seek a qualified agent you can trust, then work in conjunction with the agent, the insurance company and the insurance company’s loss control department to build a well rounded program. Accidents happen, but the best way to contain costs is to provide as safe a work environment as possible.