I've never had a loss, so why do my costs keep rising?
Rates and employers' costs increase whenever losses in Wisconsin increase. Losses increase when there is a benefit increase in the law; when there are more losses; and when losses cost more in indemnity benefits or medical expenses.
Does this mean my premiums reflect losses of all employers in Wisconsin, even those with more hazardous work?
The overall change in premium level in Wisconsin is based on total Wisconsin premiums and losses of all employers. However, once that determination is calculated, the change is distributed, first to "industry groups" (i.e., manufacturing risks, contracting risks, and all other risks), and then to the more than 650 classifications that represent the business of each insured employer. If the particular employer classification is a large class with many Wisconsin employers, such as "creameries," the final rate ultimately determined for the class is based primarily on the combined loss experience of all Wisconsin creameries only.
Small employer classes would have a rate based partially on the class experience, with the remainder based on the loss experience of similar businesses throughout the country, and the current underlying rate.
Do premiums paid by Wisconsin employers subsidize the losses of employers in other states?
Wisconsin premium dollars are used for Wisconsin claims and other states are not directly subsidized. Some employers tend to confuse the use of countrywide experience in Wisconsin ratemaking with some form of subsidy. This is not the case. Countrywide loss experience is only used to develop class rates in Wisconsin when a class has no experience in the state. Even when no class exists, a class rate is still developed because some employer may eventually start that kind of business and need to buy a worker's compensation insurance policy.
If I operate year-after-year without a loss, does this mean I am subsidizing my competitors who have losses and receiving no benefit whatsoever for my good experience?
If you are a very small risk, this could be true. However, a small risk could go 10 years without a loss and then experience one loss in the 11th year that costs more than the premiums paid by the employer during those 11 years. The benefit you get from insurance is the protection against catastrophic financial losses and peace of mind.
If you are a larger risk and have been paying premiums each year in excess of $6,250, you do receive a benefit for your good experience. Likewise if you are a larger risk and have had poor loss experience, you will be penalized for your experience. Both of these adjustments occur under the Wisconsin Experience Rating Plan, which is mandatory for all risks with annual premiums currently in excess of $6,250.
I have a friendly competitor in my business and we both pay about $25,000 a year in premium. In the three-year period used for experience rating, he had a claim that cost over $100,000 while my losses averaged about $2,000 or less and my three-year total losses were only $15,000. Yet, he received an experience rating credit and I was debited. How can this happen? Is this fair?
Yes, it can happen and from an insurance viewpoint it is completely fair. To understand these answers one must understand the Experience Rating Plan and how it works.
The Experience Rating Plan is designed and intended to "reward" risks with good loss experience and "penalize" the risks with poor experience. In deciding what kind of employer is good or poor, the emphasis is on frequency of loss. The insurance logic is: "anyone can have a bad loss, while still being a good, safe operating employer. An employer having many losses however, even if they are all smaller losses, probably has a safety problem and will continue to have many losses until something is done by the employer to correct the problem."
For example, an executive of a firm could be killed in a plane crash while on business and this could easily be over a $100,000 loss, yet it has nothing to do with the safety of the firm's overall operations. Because of this, the Experience Rating plan equalizes the effects of losses by limiting each loss of the rated employer to a maximum of $6,250. In this example, the one employer had only $6,250 of actual losses (the $100,000 reduces to $6,250) while the other employer had several smaller losses totaling $15,000. If the expected losses for both employers was about $12,000 you can see why the first employer still received a credit ($6,250 compared to $12,000), and the second was debited ($15,000 compared to $12,000). Worker's compensation studies have shown that a risk that has many smaller losses, year-after-year, is the more costly risk to insure in the long run.
My agent obtained my worker's compensation insurance through the Pool because he couldn't get coverage from any company he represented. Does this mean I'm a bad risk? Is insurance through the Pool detrimental to me in any way?
Being insured through the Pool does not mean the employer is a "bad risk" nor is there a negative stigma to being the in the Pool. In fact the rates are exactly the same in the Pool as in the voluntary market. This does not mean that there are no price disadvantages.
Risks with over $6,250 in premium receive a "premium discount" in the voluntary market to recognize expense savings. Pool risks do not receive a premium discount. Many risks are eligible to receive dividends when insured in the voluntary market. Pool risks are not eligible. Employers with operations in several states can usually insure all of their operations under one worker's compensation insurance policy in the voluntary market. A Pool policy covers only Wisconsin operations and additional policies would need to be purchased to cover operations in other states.
What risks are most commonly insured through the Pool?
Most of the risks insured through the Pool have generally been identified as one or more of the following:
- The risk is considered a poor risk because of a terrible loss experience and no insurance company will voluntarily insure it unless the employer takes steps to reduce or eliminate losses.
- The risk is in a business that generally is not profitable to insure and insurance companies are not voluntarily writing this particular class of business at the present time.
- The risk is a new employer and has not been operating long enough to have a loss experience "track record." Insurance companies tend to wait and see how a new employer does during the first three to five years.
- The agent for the risk represents few or perhaps only one insurance company and the insurance company is not writing worker's compensation for the particular class of business at this time.
- The risk is very small with estimated premiums under $2,000. Few insurance companies are interested in insuring smaller risks because of the difficulty to achieve a profit insuring these risks. Much of the premium is used for expenses with little left to pay losses.
I'm a small risk with very little payroll and I have to pay a "minimum premium" which is just too high. Why?
Minimum premiums in Wisconsin are established for each classification by the Rating Bureau and approved by the Commissioner of Insurance. The minimum premiums cover the expense of issuing a policy with a nominal amount available for losses. Classifications with lower rates have lower minimum premiums and classes with higher rates have higher minimum premiums. Generally the minimum premium is based on an annual payroll of $17,000 which is less than half of the average annual wage for one employee in Wisconsin. As the state average annual wage increases, so do minimum premiums subject to the applicable maximum. Currently the minimum premium is capped at $900.
Wisconsin is the only state to have a "minimum-minimum premium" rule. This special rule provides that the minimum premium can be adjusted at the end of the policy whenever the minimum premium is greater than 20% of the actual earned payroll of the employer. In those cases, the final applicable minimum premium is limited to 20% of the earned payroll, but not less than the policy expense constant, which is currently $220.
I think I'm misclassified. My employees do different work than the employees of others I'm classified with! What can I do?
Under Wisconsin law, the Rating Bureau has the responsibility and the authority to classify risks in any reasonable manner. The Rating Bureau generally follows the same classifications developed by the National Council on Compensation Insurance (a national rating organization that is advisory in Wisconsin) but there are a number of Wisconsin exceptions.
Worker's compensation insurance is very unusual in two distinct ways; first, it is mandatory for most employers; and secondly, the named insured is not the direct recipient of the policy benefits.
Employees receive benefits that are paid by the insurance company on behalf of the employer, which is the named insured. In classifying the risk, the Rating Bureau does not look at what work an employee does, but rather classifies the business of the insured employer. The only exceptions to this concept are clerical office employees, outside sales people, and drivers.
Some employers actually engage in several businesses at the same time. Contractors could actually have employees working in the carpentry business, others in the plumbing business, and still others in several different trades. If the employer keeps separate payrolls for each trade they are assigned classifications to each "business" or trade.
If after reviewing your business and the business of those you compete with, and you believe that you are misclassified, please contact the Rating Bureau and request an inspection. The Rating Bureau has three full-time inspectors who average about 1,750 inspections per year. Inspections are conducted within 30-45 days after receipt of a request. The inspections will either verify the accuracy of the classification assigned or will reclassify your business properly.