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Glossary of Workers Compensation Related Terms.
Advisory
Organization: The new designation for what were formerly
known as Rating Bureaus (such as the NCCI). This new term,
recently coined by the National Association of Insurance
Commissioners, is meant to reflect more accurately the role of
NCCI and other such organizations (like Insurance Services Office)
which compile rating data and file policy forms for use by member
insurance companies.
A.L.E.: Allocated Loss Expenses,
which are insurance company costs for adjusting and settling
claims which can be identified with a specific claim. The A.L.E.
are often then included in the claims costs used to adjust premium
in some loss-sensitive premium adjustment types of Workers' Comp
policies, such as sliding scale dividend plans or some Retro or
Retention plans.
ARAP: Assigned Risk Adjustment Program--An
additional adjustment to the Experience Modification Factor, used
in some states to adjust premium for Assigned Risk policies.
Although NCCI includes this adjustment on all their Mod
worksheets, not all states use the ARAP program. Illinois, for
instance, charges higher rates for Assigned Risk policies, and
thus does not use the ARAP adjustment to the Experience Mod.
Assigned Risk Plan: Sometimes called
the Pool, this is a mechanism established by individual states to
make sure that employers can obtain workers' compensation
insurance even if insurance companies are not willing to write
such insurance on a voluntary basis. Assigned Risk plans in many
states carry higher rates than the voluntary market.
Audited Premium: The final premium
for the policy term, produced by auditing actual payroll
exposures.
Audit Workpapers: Worksheet prepared
by the premium auditor, can be either hand-written or
computerized, showing how the auditor arrived at the payroll
numbers that are used to determine the audited premium.
Direct Writer: An insurance company
that does not work through independent insurance agents. The
largest direct writer of Workers' Compensation insurance is
Liberty Mutual. Agents for direct writers are employees of the
insurance company.
Dividend: A return of premium,
calculated after policy expiration, based on the over-all
performance of the insurance company or of a group of insureds.
Dividends cannot be guaranteed in advance, although they are often
shown on proposals for insurance.
Employers' Liability: Section B of
the standard Workers' Compensation insurance policy, this is the
part of the policy that has a dollar limit shown for the coverage.
This section insures employers for liability towards employees
that is not covered by the statutory Workers' Compensation
provisions of the state (which are insured in Section A and have
no set dollar limit on the policy).
Excess Losses: In the Experience
Modification Factor, the amount of any single claim that exceeds
$5,000.
Experience Modification Factor: An
adjustment to Manual Premium, calculated by an advisory
organization (also known as rating bureaus) such as NCCI, based on
historic loss and payroll data of a particular insured.
Experience Period: The window of time
from which loss and payroll data is used to calculate an
experience modification factor for an employer. Normally this
window is a three year period, starting four years prior to the
effective date of the experience modifier. However, rating bureaus
do not wait until three full years of data are in the experience
period before producing an experience rating for an employer. If
an employer reaches a certain, relatively low threshold of
workers' compensation insurance premiums in any one of the three
years in the experience period "window", this will make
that employer eligible for experience rating.
Fronting: An arrangement between two
insurance companies to produce an insurance policy (usually
workers' compensation) for a third party wherein one insurance
company produces the official policy (for a fee) but cedes all
losses from that policy to the other insurer. This kind of
arrangement is used in situations where the insurer writing the
risk is not an admitted company in a particular state, and the
coverage needs to be written by an admitted carrier. In order to
meet the statutory requirements, the first insurer pays a second
(admitted) insurer to "front" the policy, even though
the first insurer remains responsible for paying all losses
arising under the policy. This kind of arrangement is often used
by captive insurers when they are not admitted carriers in a
particular state.
Governing Classification: The
classification code on an employer's workers' compensation
insurance policy that generates the most payroll aside from
standard exception classifications such as clerical or outside
sales (unless there is no other workplace classification
applicable other than a standard exception).
Guaranteed Cost: A Workers'
Compensation insurance policy that is not subject to adjustment
due to losses that occur during the policy term. In a Guaranteed
Cost policy, the only variable affecting premium that should
change between policy inception and audit is payroll. This is in
contrast to the various kinds of Loss Sensitive plans, such as
Retrospective Rating, Retention Plans, or Sliding Scale Dividend
Plans, where there is a premium adjustment made based on losses
incurred during the policy term.
Incurred Losses: Paid losses plus
loss reserves for estimated future claims costs. Many loss
sensitive insurance policies adjust premium based on incurred
losses rather than just on paid losses.
Interstate Rating: An experience
modification factor that applies across more than one state.
Interstate ratings are calculated by NCCI for employers whose past
workers compensation insurance policies show payroll in more than
one state. Most, but not all states, participate in the interstate
rating system. A few states, such as Michigan, Pennsylvania, and
Delaware, do not participate in interstate rating, but instead
continue to calculate separate experience ratings for employers
who operate in their jurisdictions, even if those employers also
qualify for interstate rating. Those employers thus have one
experience modifier applying to their operations in most states
but a separate modifier calculated by the stand-alone state rating
bureau. The separate stand-alone mod would apply only to workers
compensation insurance premiums developed for the employer's
operations in that stand-alone state.
Manual Premium: Workers' Compensation
premium calculated by multiplying payrolls by appropriate rates,
before application of Experience Modifier, Schedule Credit, or
Premium Discount.
Medical-Only Claims: Claims for which
the only cost is medical care, without any lost-time benefits
being paid.
Modified Premium: Workers'
Compensation premium calculated after application of Experience
Modification Factor. Similar to Standard Premium, but does not
reflect any Schedule Credits or Debits.
NCCI: The National Council on Compensation
Insurance--the organization responsible in many states for
determining proper Workers' Compensation classifications,
Experience Modification Factors, and collecting data used for
ratemaking. NCCI also writes the manuals used in many states to
calculate Workers' Compensation premiums, and also administers the
Assigned Risk Plan in many jurisdictions. NCCI is a private
organization, not connected with government, although it is often
mistakenly thought to be a governmental agency.
Premium Auditor: A harmless drudge
(with apologies to Samuel Johnson and auditors everywhere-- just
kidding!) The premium auditor determines actual exposure
(remuneration) for a policy period, in order to determine the
final audited premium. The auditor typically works either directly
for the insurance company, or for a third-party company retained
by the insurance company.
Premium Discount: A premium credit,
based on size of the premium paid. It is normally given
automatically on voluntary market policies, although Retrospective
Rating or Sliding Scale Dividend policies usually do not have a
Premium Discount.
Primary Losses: In the Experience
Modification Factor, the first $5,000 of any single loss.
Rating Bureau: See NCCI. Some states
maintain their own separate rating bureau, although these often
follow NCCI rules and use NCCI manuals. Currently, the states of
California, Delaware, Hawaii, Indiana, Massachusetts, Michigan,
Minnesota, New Jersey, New York, North Carolina, Pennsylvania,
Texas, and Wyoming operate their own non-NCCI rating bureaus. Many
of these largely follow NCCI rules for computing premiums and
classifications, but California, Delaware, Texas, and Pennsylvania
are notably different than NCCI in some aspects of classification
and premium computation.
Remuneration: The basis for
calculating Workers' Compensation premium. Remuneration is
primarily payroll, but may also include other forms of employee
compensation. Workers' Compensation premium is computed by
applying varying rates (for different classifications) (per
hundred dollars of remuneration).
Residual Market: Workers' Comp.
written through an Assigned Risk Plan.
Retrospective Rating: A Workers'
Compensation insurance policy that makes a subsequent adjustment
to premium, after policy expiration, based on losses generated
during the policy period. The adjustment can go up or down, within
set parameters, based on the losses generated during the policy
period.
Retention Plan: Similar to
Retrospective rating, this is a Workers' Compensation policy
format that adjusts the premium, up or down, based on losses (and
associated costs) that occur during the policy period.
Schedule Credit/Debit: A
discretionary premium adjustment based on underwriters evaluation
of special characteristics of a risk not reflected in the
Experience Modifier.
Scopes Manual: Manual produced by
NCCI which details what kinds of workplace exposures belong in
particular Workers' Compensation classification codes.
Sliding Scale Dividend: A return of
premium, after policy expiration, based on the actual loss
experience of the insured business. The size of the dividend
varies with the actual loss ratio of the insured business.
Short Rate Penalty: A penalty applied
by insurers when a Workers' Compensation insurance policy is
cancelled by the insured before the expiration date of the policy.
This penalty is steep in the early days of the policy, and
gradually tapers off the closer the policy gets to the expiration
date.
Standard Exception: Classifications
which are normally not included in the governing classification.
These are clerical, outside sales, and often (but not always)
drivers.
Standard Premium: Premium after
application of Experience Modifier and Schedule Credit or Debit,
but before Premium Discount.
Voluntary Compensation: An
endorsement to the standard Workers' Compensation insurance policy
which extends coverage to employees not required to be covered
under the state's statutory Workers' Compensation provisions.
Voluntary Market: Workers'
Compensation insurance written outside of the Assigned Risk Plan.
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