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.
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.
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:
- 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.
- 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.
- 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
- 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.
- Analyze loss runs – if you had at least one or more bad claims years, your E-Mod can increase significantly in the next year.
- 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.
©J&L Risk Management Inc Copyright Notice