Workers’ Comp Schedule Rating Plans Can Be Used to Increase or Reduce Premiums
By Donald T. Decarlo and Roger Thompson
In 2017, of the 38 states where the National Council on Compensation Insurance (NCCI) -the insurance rating and data collection bureau specializing in workers’ compensation for the majority of states- made rate filings, 36 of those filings were for decreases; many of which were double digit decreases. The trend continued in 2018 where NCCI filings showed decreases proposed in 36 states. In 13 of those states, the rate filings decreases were greater than 10%:
In states where rates are approved by independent bureaus, there is a similar downward trend in compensation rate. The New York Department of Financial Services approved a 11.7% decrease in workers’ compensation loss costs effective October 1, 2018. In New Jersey, the insurance commissioner approved a 5.1% rate decrease for workers’ compensation premiums on a new and renewal basis. And in California, the rate filing approved, effective January 1, 2019, a decrease in workers’ compensation pure premiums costs an average of 8.4%.
The continuing trend to reduce workers’ compensation rates and/or loss costs at the state level prompts insurers to look for ways to increase premiums based on available pricing mechanisms. To that end, the majority of states allow discretionary credits or debits by insurers. These are generally known as schedule rating plans and work much like experience modification factors. They are percentage discounts or surcharges that further adjust the modified premium. A 25% schedule credit would further reduce an employer’s premium charges by 25%, while conversely, a 25% schedule debit would increase an employer’s premium by 25%.
Schedule rating is used to alter manual rates to reflect individual risk characteristics and unique employer traits that are expected to have a material effect on the insured’s future loss experience that are not actually reflected in the manual rate. For example, if a company implements a new loss control program, it is expected that future losses will be lower than that indicated by the actual historical experience; consequently, an underwriter can use schedule rating to reflect this.
These schedule credits and debits are filed by the rating organizations on behalf of the insurers with state regulators and are intended to be used on a rational and specified basis. If approved, the insurer can then apply up to that maximum credit or debit for a particular policyholder. While some states permit schedule rating for any size risk, a number of states establish an eligibility level of $1,000 minimum annual premium at manual rates. In New York, to be eligible for schedule rating, the annual manual premium must be $2,500 or greater and the maximum schedule rating adjustment is limited to plus or minus 5% exclusive of any other approved credit or debit program (e.g. Safety Incentive Program, Drug and Alcohol Prevention Program, etc.). In New Jersey, the premium size must be greater than the minimum premium for that classification and the schedule rating credit or debit is limited to 25%.
Schedule rating permits the premium for a risk to be modified in accordance with a table that delineates those characteristics of a risk that may not be reflected in its experience. The following lists those characteristics to be considered along with a number of possible specific considerations associated with each:
• Premises/Work Environment
• General housekeeping
• Preventative maintenance
• Workplace hazards/housekeeping
• Workplace design
• Ergonomics
• Classification Peculiarities
• Exposures or hazards not considered in the classification
• Exposure variations due to technology changes
• Medical Facilities
• First aid or medical assistance on site
• Emergency and disaster plans
• Industrial hygiene
• Alcohol or substance abuse programs
• Safety Devices
• Written safety programs
• Loss control programs
• Personal protective equipment
• Routine inspection and maintenance reviews
• Accident investigation and analysis
• Employees – Selection and Supervision
• Pre-employment physicals
• Drug screening
• New hiring and job-specific training
• Management
• Cooperation with insurer
• Safety organization
• Return-to-work programs
The characteristics denoted above may be objective (e.g., on-site first aid or medical assistance) or subjective (e.g., quality of company management). Objective characteristics are generally easier to quantify and validate. However, schedule rating often requires significant underwriting judgment. In general, state insurance laws and regulations require that the filed schedule rating guidelines be applied consistently and documentation is frequently required to support the application of each credit and debit.
Schedule rating premium adjustments must be reported under unique statistical codes on unit statistical reports submitted to the NCCI. All schedule debits and credits are to be based on evidence that is contained in the file of the insurer at the time the schedule debit or credit is applied. The effective date of any schedule debit or credit shall not be any date prior to the receipt in the insurer’s office of the evidence supporting the debit or credit.
Where experience rating is used in addition to schedule rating, it is important to recognize that a new characteristic (e.g., a newly implemented safety program) reflected in the schedule rating adjustment will eventually be reflected in the loss experience. The key is for the underwriter to avoid double-counting the effect of a risk characteristic in both the experience modification and schedule rating.
Note that in this current depressed workers’ compensation premium rate environment, premium rates can be adjusted to reflect increased risk characteristics that more accurately reflect the insured’s claims exposure.
Donald T. DeCarlo, Esq. is the principal of an independent law firm in Fresh Meadows, NY, which focuses on mediation/arbitration and regulatory and insurance counseling. Previously, he was Partner at Lord Bissell & Brook LLP and headed its New York office. He was Senior Vice President and General Counsel of The Travelers Insurance Companies, Deputy General Counsel for its parent corporation Travelers Group, Inc. and Executive Vice President and General Counsel for Gulf Insurance Group.
Mr. DeCarlo is a Certified ARIAS-US Arbitrator and Umpire, a Master Arbitrator for the NYS Insurance Department, and an Arbitrator for the American Arbitration Association and Center for Dispute Resolution. He is the Founder, Chairman and President of The American Society of Workers Comp Professionals, Inc. (AMCOMP). In addition, Mr. DeCarlo is a Director of 17 companies in the insurance industry.
Mr. DeCarlo has authored numerous scholarly articles in legal and trade journals and is a co-author of two books on workers compensation insurance, Workers Compensation Insurance & Law Practice – The Next Generation and Stress in the American Workplace – Alternatives for the Working Wounded.
Mr. DeCarlo Chairs an Advisory Committee of the World Trade Center Captive Insurance Company, and formerly served as Chairman and Commissioner of the New York State Insurance Fund (NYSIF) for 10 years. He also served as an Inspector for the NYS Athletic Commission.
Roger Thompson is a retiree from Travelers Insurance following thirty years of service in the area of Workers Compensation. Prior to his retirement, Mr. Thompson was Director for Worker’s Compensation Legislative and Regulatory Issues. A graduate of the University of California, Santa Barbara, he began his career with Travelers in Des Moines, Iowa in 1969 and subsequently transferred to the Home Office in Hartford, Connecticut in 1976.
During his career with Travelers, Mr. Thompson worked with various trade associations including the American Insurance Association (AIA), The International Association of Industrial Accident Boards and Commissions (IAIABC) and served on the Research Committee at the Workers Compensation Research Institute (WCRI).
Mr. Thompson is married with two sons and four grandchildren.
