Masonry Magazine June 1986 Page. 30
WORKERS COMPENSATION
continued
The benefits awarded to the widow and children of a young worker will be far greater than those for a middle-aged worker, with no dependents, killed in the same accident. To ensure that undue emphasis is not given to the individual claim amounts the experience rating plan gives greater weight to accident frequency than to accident severity.
Frequency is also a better measure of the quality of safety in the employer's workplace. As everyone knows, accidents will happen. The employer with a single relatively costly accident is clearly a better risk than one with many smaller ones even if the single loss is identical to the sum of the others. Any accident has the potential to produce a large claim, so it follows that the fewer the accidents, the less likely are substantial claims.
But neither can severity be ignored. The experience rating plan uses a method called "split rating" to weigh severity and frequency. The cost of every injury is split between a basic or "primary value" and the balance of the claim, which is called the "excess." Thus, the full value of the primary loss is used in each rating, emphasizing accident frequency. The excess losses come into play only as the risk size grows (since greater volume means greater statistical significance remember the Law of Large Numbers).
Excess losses may be totally excluded from the ratings for small insureds, partially included for medium-sized employers, and fully weighted into the rating of the largest businesses. Whether they are included depends upon the statistical credibility of the experience of the individual insured. Some large businesses produce such a volume of payroll and losses that their losses are fully credible- statistically predictable.
On the other hand, the smallest businesses suffer losses largely at random and have no credibility. In between are the run of medium-sized businesses whose experience offers some indication of future results, but is not fully credible.
Experience rating is mandatory for insureds who qualify in size. In most states that means all insureds in business for two years, with premiums of at least $2,500 a year. Experience ratings are prepared by the appropriate rating organization, rather than the individual insurance carriers. Thus, no matter which insurance company a firm selects, it will have the same experience rating.
The experience rating includes all businesses under common ownership and the injury records for all states where coverage may be provided by private carriers (there are six states where private carriers may not write workers compensation insurance) or competitive state funds. The interstate experience modification will apply in all states save California, Delaware, Michigan, New Jersey, and Pennsylvania, where interstate rating has been precluded by state laws. In these states, an intrastate experience modification applies for the particular state. Any operations the employer may have in other states is interstate related, excluding the experience of the preceding states.
Because of its widespread acceptance, experience rating is a standard of measure that can be, and is used by all. With experience rating you can reconcile the twin objectives of sharing the risk and recognizing the efforts, or lack of them, of individual employers to provide a safe workplace for their employees.
Part II of this article, which will focus on occupational diseases and whether the current workers compensation rates are too high, will appear in the March/April issue of Masonry.