Blog Reader Questions
A Question from blog reader on the last three articles. Could you go through the math on how Primary Losses and Excess Losses affect Workers Comp premiums?
Yes, no problem, as this is a very critical subject with a company’s Workers Comp premiums. Let us go back to the last example. You may want to get out your State Rating Bureau or NCCI Experience Rating Sheets.
An adjuster sets the Total Incurred on a file as $30,000. If we break down the loss into the two basic components:
- Primary Loss = $15,000
- Excess Loss = $15,000
To distill down the complicated rating formula, we should use the basic formula.
Look at the bottom left of the Experience Rating (E-Mod) Sheets. There is a factor there that is figured (discounts) the Excess Loss. We will use 20% as the factor to make the calculations easier.
The Primary Loss affects the Workers Comp Premiums dollar-for-dollar. The Excess Loss is Multiplied by 20%. So, the Primary Loss and Excess Loss in TRUE PREMIUM DOLLARS is:
- Primary Loss = $15,000
- Excess Loss = $15,000 * 20% =$3,000
In the first posting, if you have five $15,000 claims versus one $75,000 claim, they would look like the same effect on premiums, but due to the discount factor, the $30,000 claim affects the Workers Comp premium by $18,000 but five $15,000 claims affect the premiums by $75,000.
Why does this happen? The insurance rating system is designed to heavily penalize multiple accidents, not one larger ones.
In the second posting about there being no such thing as a small claim, every claim affects the Workers Comp premiums in full up to $15,000. We often hear “Oh, well that was only a $13,000 claim.” The claim is not small as the premiums are being affected 5 times more heavily in the first $15,000 than the part of the claim above $15,000.
This can be confusing. Email or call with questions.
©J&L Risk Management Inc Copyright Notice
