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Payroll Audit Increased Policy Cost By 150% – Five Scenarios


Payroll Audit Increased Policy Cost Significantly

Below are five scenarios why your payroll audit may have increased policy cost.

I received this question earlier this week from a California .  A related question on policy premium is here.

Graphic of 150% color red Payroll Audit Increased Policy Cost
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We had switched agents and carriers as our company was offered a very low policy premium as compared to our previous agent and carrier.  We just had our audit and our premiums increased from approximately $125,000 to over $300,000.  How did this happen?

The money that your company paid the agent at the inception time of the policy is referred to as a deposit premium.  The deposit premium that you pay upfront has little to do with what your company will finally end up paying in premiums.

The basic definition of deposit premium is the amount your company must pay at the start of the policy to the carrier for your company to be accepted as an insured.

Picture Of Calculator And Payroll Audit Paper

Properly budgeting for a Workers Comp paid policy (deposit premium and audit premium)  is sometimes not an easy task.

The easiest way to start is by:

  1. Reviewing what you paid last year in premiums.  If your company did not change that much from the previous year, did your company actually expect a $175,000 discount?  Premiums among carriers vary some, but not that much.
  2. Accounting for any payroll changes – this is a popular scenario – if your company was very successful and your payroll increased by a large amount, you should expect some type of increase at premium audit.
  3. Company changes such as layoffs, purchasing new companies, or change of ownership.  Major changes to your company will usually have an effect on  your Workers Comp premiums
  4. Workers Comp law changes –  This is not as common, but can have a very large effect on premiums.   An example is when West Virginia changed from a monopolistic state to an open market system.
  5. Analyze loss runs – if you had at least one or more bad claims years, your E-Mod can increase significantly in the next year.
  6. Hand Gesture Payroll Audit With Increase Graph

    Bonus- Analyze NCCI or State Rating Bureau Ex-Mod sheets –   your E-Mod/X-Mod is basically a multiplier of risk.  If you have a high E-Mod, then any premium increases at audit can be significant.  For example, having a .8 versus a 1.2 E-Mod is a 40% swing in premiums. This is one area “that sneaks up” on employers.   You can actually know what your E-Mod is 6 months before policy renewal and/or 3 months before the rating agency publishes your E-Mod.

The deposit premium that you paid is just to get your company insured under an applicable Workers Comp policy.  There are no rules on how much the deposit premium should be from year to year.  It is whatever the carrier will accept upfront to write you a policy.   I have seen policies where the deposit premium was $850 and the total amount owed at premium audit (payroll audit) was in excess of $300,000.

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3 Responses

  1. A change from .8 to 1.2 is actually a 50% increase in premium, .4/.8. Plus there may be other penalties such as ARAP, higher rating tiers from the carrier, schedule debits to the premium. The difference from .8 to 1.2 is more likely a 100% to 150% increase.

  2. A change from .8 to 1.2 is actually a 50% increase in premium, .4/.8. Plus there may be other penalties such as ARAP, higher rating tiers from the carrier, schedule debits to the premium. The difference from .8 to 1.2 is more likely a 100% to 150% increase.


James J Moore - Workers Comp Expert

Raleigh, NC, United States

About The Author...

James founded a Workers’ Compensation consulting firm, J&L Risk Management Consultants, Inc. in 1996. J&L’s mission is to reduce our clients’ Workers Compensation premiums by using time-tested techniques. J&L’s claims, premium, reserve and Experience Mod reviews have saved employers over $9.8 million in earned premiums over the last three years. J&L has saved numerous companies from bankruptcy proceedings as a result of insurance overpayments.

James has over 27 years of experience in insurance claims, audit, and underwriting, specializing in Workers’ Compensation. He has supervised, and managed the administration of Workers’ Compensation claims, and underwriting in over 45 states. His professional experience includes being the Director of Risk Management for the North Carolina School Boards Association. He created a very successful Workers’ Compensation Injury Rehabilitation Unit for school personnel.

James’s educational background, which centered on computer technology, culminated in earning a Masters of Business Administration (MBA); an Associate in Claims designation (AIC); and an Associate in Risk Management designation (ARM). He is a Chartered Financial Consultant (ChFC) and a licensed financial advisor. The NC Department of Insurance has certified him as an insurance instructor. He also possesses a Bachelors’ Degree in Actuarial Science.

LexisNexis has twice recognized his blog as one of the Top 25 Blogs on Workers’ Compensation. J&L has been listed in AM Best’s Preferred Providers Directory for Insurance Experts – Workers Compensation for over eight years. He recently won the prestigious Baucom Shine Lifetime Achievement Award for his volunteer contributions to the area of risk management and safety. James was recently named as an instructor for the prestigious Insurance Academy.

James is on the Board of Directors and Treasurer of the North Carolina Mid-State Safety Council. He has published two manuals on Workers’ Compensation and three different claims processing manuals. He has also written and has been quoted in numerous articles on reducing Workers’ Compensation costs for public and private employers. James publishes a weekly newsletter with 7,000 readers.

He currently possess press credentials and am invited to various national Workers Compensation conferences as a reporter.

James’s articles or interviews on Workers’ Compensation have appeared in the following publications or websites:

  • Risk and Insurance Management Society (RIMS)
  • Entrepreneur Magazine
  • Bloomberg Business News
  • WorkCompCentral.com
  • Claims Magazine
  • Risk & Insurance Magazine
  • Insurance Journal
  • Workers Compensation.com
  • LinkedIn, Twitter, Facebook and other social media sites
  • Various trade publications


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