Classification By Analogy
The term Classification by Analogy is one of those workers comp buzzwords that generates a large number of emails and call to us. The term is usually mentioned by a workers comp auditor or rating bureau.
One of the challenges of classification is when there is no direct classification for a business. Sometimes, no code fits.
California’s Rating Bureau – the WCIRB (Workers Compensation Insurance Rating Bureau) publishes many great explanations of workers comp terms as does the NCCI. The rating bureau has that covered with the classification by analogy moniker.
- Any business or operation specifically described by a classification shall be assigned to that classification.
- Any business or operation not described by a classification shall be assigned to the classification(s) most analogous from the standpoint of process and hazard.
The dictionary term for analogy is:
- a similarity between like features of two things, on which a comparison may be based
- similarity or comparability:
- Biology. an analogous relationship.
- the process by which words or phrases are created or re-formed according to existing patterns in the language, as when shoon wasre-formed as shoes
- a form resulting from such a process.
- Logic. a form of reasoning in which one thing is inferred to be similar to another thing in a certain respect, on the basis of the known similarity between the things in other respects.
The #5 definition may make ones head spin. That definition is important when it comes to Workers Comp ratings by analogy.
Here is a great example of the #5 definition above by the WCIRB –
For example, Classification 2501(1), Clothing Manufacturing, contemplates cutting and sewing of fabric to produce
clothing and is often assigned by analogy to employers that cut and sew fabric to produce other non-clothing items. For this reason, Classification 2501(1) is often the first classification that comes to mind for employers engaged in any cutting and sewing operations. However, classifications such as Classification 2576,Awning, Tarp or Canvas Goods Mfg., and Classification 2571, Pillow, Quilt, Comforter or Cushion Mfg., also include cutting and sewing operations and must be assigned to the operation rather than Classification 2501(1) if they more specifically describe the employer’s operations.
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I would agree that assigned by analogy is more of an art form than exact science, and yes it gives insurance types more than a moments pause when they have to assign a class code in this manner. I would also agree that an employer knows their business better than anyone, however workers compensation classifications is a very complex animal and getting the two sides to understand each other is not easy for both sides. My advice is to ask a lot of questions, and if it doesn’t seem right, keep asking questions until you have a good grasp of how it all applies to you since it will benefit the employer in the long run.
Another important factor is when you start and stop an operation that greatly impacts what code or number of codes that may apply that varies by state as well. For example, lets take the manufacture of ethanol to illustrate this point. This is a corn based product and thus the growing & selling of the corn is assigned to a farm code. The distilling of the mash to produce pure ethanol is a separate code In NCCI states with 15 national codes that specifically mention some word variation of “distill” in the phraseology to choose from. If you add in the state specials, you are well over 135 choices for codes that mention “distill” if you did this operation in multiple states nationwide.
Lets continue with this example. If you are blending the ethanol with gasoline (i.e. E85 blend) to sell, then you are in the gasoline mfg. code. If you sell the product to the retail customers, then a gas station code is where you would be assigned. Now if a corn farmer did the entire process from growing the corn to a retail gas station, then he would be assigned based on where he stopped his operation. The same is true if he stopped at the growing of corn, or making the mash, or blending with gasoline as well. Again where you start and stop your operation or business dictates what codes may or may not be applicable in a particular state.
Now the last part of assigned by analogy is experience. Workers comp has been around over 100 years, and that history of where certain operations have been assigned in the past is a good place to start. A variety of states have or have had an assigned by analogy index over the years in states like CA, MA, NY, NCCI, etc that have provided historical guidance. That must also be tempered by review to determine if it still should be assigned to those same codes, or to other codes that have recently changed or been updated in a particular state.
Just my 2 cents as a well seasoned premium auditor, CG
Thanks Carlos for your comments as always.