Workers Compensation Premium Surcharge

Question: Why am I receiving a Workers Compensation premium surcharged for a business I just bought?
So you just bought a business, congratulations! As a business owner there are a couple of things you should know when it comes to Workers Compensation.
In the State of California it is important to know the Experience Modification (Ex Mod) of any business you are considering purchasing. The State has very specific rules regulating when the Ex Mod will stay with the business (nominal change), even if the business has new management, and when the Ex Mod will not transfer to the new owner (material change).
You may be wondering why the Ex Mod of the business you acquired is important; if you purchased a business with a debit Ex Mod you may inherit the surcharge. As an example, let’s assume you purchased a business with an Ex Mod of 150%. If the going rate for the governing class of business is $10.00 per $100.00 of payroll, you will be paying $15.00 per $100.00 of payroll (before additional credits or debits). You will be paying a 50% surcharge on your Workers Compensation coverage. A well run competitor down the street may be paying $10.00 (versus your $15.00) for employees engaged in the same activity. You are at a competitive disadvantage. To make matters worse, if your competitor down the street has actually controlled their Workers Compensation losses they may have a credit Ex Mod. Instead of paying $10.00 per $100 of payroll, if we assume that they have an Ex Mod 75%, they would be paying $7.50 per $100.00 of payroll (before additional credits or debits). In this case if you inherited an Ex Mod of 150% you are paying DOUBLE for the same state mandated coverage (versus the competitor with a 75% Ex Mod).
What is an Experience Modification? The State of California expects every business to generate a certain level of Workers Compensation losses (segregated by Workers Compensation payroll class). Loss data is collected on statewide basis and reviewed annually. As the loss data is accumulated the Workers Compensation Insurance Rating Bureau (WCIRB) calculates all of the losses by class of business and develops an Expected Loss Ratio (ELR). This ELR is used across the state for everyone with the same Workers Compensation class. Your payroll by class is calculated against the ELR and you now have your expected losses. The WCIRB will then gauge your expected losses against your actual losses. The difference determines if you receive a credit or debit Ex Mod.
What is the point to all of this, and what does it mean to you? As part of your due diligence process when purchasing a business you should look into the Ex Mod and the Workers’ Compensation loss runs. You can do the following with this data:
  • Ask the questions and understand if you are going to be surcharged on your Workers’ Compensation premium
  • Understand the level of attention the current owners are providing towards safety and loss prevention
  • Since the Ex Mod is a trailing indicator, forecast what the Ex Mod will be in future years
  • Give you an opportunity to reduce the selling price for the business you are purchasing
Please keep in mind that the WCIRD issues all Ex Mods, and the rules do change from time to time. To schedule a meeting to review Ex Mod calculations, contact Beissel & Cobb Insurance Services today!