Switching Workers Comp Policies Early = Expensive Coverage
What prevents insureds from switching workers comp policies constantly or early in the policy period? The short rate penalty or short rate premium carries heavy penalties that discourage the practice.
Why did I pick 90 days for the example? The premium audit process usually results in a premium audit bill for the last policy period. The process usually finishes at 90 days into the next policy.
We often receive questions when an employer receives the premium audit bill. One of the associated questions concerns switching to another carrier as soon as possible.
90 Day Calculation
Let us keep this as uncomplicated as possible. A few assumptions for our example are:
- $200,000 policy premium
- Switching workers comp policies after 90 days
- CA policy – process is the same in all states (with exceptions)
Math of Switching Policies Early
- Employer expecting to pay – $200,000 * (90/360) = $50,000
- Carrier charges – $200,00 * 35% = $70,000
- The 35% comes from a Department of Insurance approved table – see bottom of article
- Short Rate Penalty = $20,000 for 90 days of coverage
Writing a check for $20,000 extra may not make economic sense. If we annualize the 90-day premium for switching workers comp policy early the policy premium would be $280,000.
Switching at 6 months seems to be less penalizing –
- Employer expecting to pay – $200,000 * (180/360) = $100,000
- Carrier charges – $200,000 * 60% = $120,000
- The 60% comes from a Department of Insurance approved table
- Short Rate Penalty = $20,000 for 180 days of coverage
- Annualized – $240,000
Many workers comp professionals have identified six months as when the penalty becomes less severe. The above example shows the difference between switching workers comp policies at different times.
Bottom Line
Switching policies after a premium audit disagreement with a carrier may not be the best use of a company’s budget. Your company does have a right to dispute a premium audit bill. An employer also can switch early during the policy. Be ready to pay dearly for the early switch.
