Pub. 4 2015-2016 Issue 1

28 San Diego Dealer I ntroduction: Workers’Compensation (WC) insurance costs to the dealership are increasingmore than other costs andmuch faster than inflation. In this newsletter, we explain: • HowWC Insurance Premium is calculated based on payroll • Howmanual premium rates are based on risks of the worker, e.g., the office worker has a lower manual rate compared to an auto service technician due to hazards on the job • How employers with greater injury rates have a higher Experience Modifier (ex-mod) • How a higher ex-mod results in higher premiums • HowWC rates have climbed over the years • How Medical Indemnity has more than doubled over 15 years • How Allocated Loss Adjustment Expense (ALAE) per Indemnity Claim has tripled over 15 years Background: Workers' compensation insurance is mandatory in the United States as well as in many other countries. The objective of WC insurance is to provide medical treatment and disability benefits to employees injured during the course of employment. The premium costs are borne by the employer alone, and the employer benefits by receiving immunity fromemployee lawsuits fromalleged negligence, etc. Cost Containment: WC insurance premiums are a significant cost to the employer. A prevailing trend on the part of employers is to contain all insurance costs, including WC premiums. These premiums increase over a base depending on the severity and frequency of injuries. As such, a reduction in injuries reduces insurance costs. The base insurance rate is a function of employees’job duties, number of employees, payroll, and a modifier used to calculate the premium. The modifier is based on the losses incurred by the employer. The losses incurred by the employer are calculated based on the claims paid by the insurance companies for injuries occurring at the workplace. Calculating Costs: In order to calculate the premium for employers in California, payroll data and losses incurred for a 3-year period are taken into account. The year immediately preceding the year for which the insurance is required is usually ignored. For example, if the premium is to be calculated for a policy beginning January 1, 2015, injuries occurring in 2011, 2012, and 2013 will be considered, while the 2014 injuries are omitted. Such calculations reflect a trend over a broader period rather than taking one year into account, possibly impacting insurance rates disproportionately. Cost Savings: To illustrate insurance premium calculations (which may vary based on the difference in injury rates), hypothetical calcu- lations were made for two employers, Employers I and II that have the same payroll. Table A shows the payroll data for each type of employee. Table B illustrates the excessive injuries of Employer I and Employer II. Employer II has four more injuries than Employer I, resulting in a total loss of $282,500 instead of a total loss of $45,004 during the same period. While the insurance company pays these losses, the difference for the two premiums is $174,570 for the year 2015. A savings of $174,570 for fewer injuries (Employer I, see Table C) offers a competitive advantage. The fact that injuries affect the premium rate for three consecutive insurance years shows how important it is to prevent workplace injuries. Investing in time, training, and equipment for employees is worthwhile, especially with significant premium savings of the magnitude described in our example. The benefits of being a caring, proactive, employee well-being focused employer in terms of employee productivity and morale are important additional considerations. Workers’ Compensation, Experience-Modifier, and How Litigation is Adding to Our Claims Employee Annual Payroll No. of Employees Payroll 2011 Payroll 2012 Payroll 2013 Clerical/Office Staff (code 8810) $ 30,000.00 20 $600,000.00 $600,000.00 $600,000.00 Sales Staff (Code 8748) $ 50,000.00 20 $1,000,000.00 $1,000,000.00 $1,000,000.00 Technicians (Code 8391) $ 40,000.00 50 $2,000,000.00 $2,000,000.00 $2,000,000.00 Total 90 $ 3,600,000.00 $ 3,600,000.00 $3,600,000.00 Table A: Payroll Data (both Employer I & II)