On November 4th, the California Insurance
Commissioner approved an increase, effective January 1, 2012, to the pure
premium rates for workers’ compensation insurance resulting in an average
increase of just over 30% in those rates (to $2.30 per $100 of payroll). This is the first increase in the advisory
pure premium rates since a 5% rate increase was approved by the Commissioner
effective January 1, 2009. In 2010 and
2011, the Commissioner kept the pure premium rates flat despite being presented
with recommendations for increases in both years. Keep in mind workers’ compensation rates are
determined by the industry classification code your business falls within. I was told by a
reputable insurance broker contractors can expect to face increases anywhere from 10% to 40% on average. If your loss history is relatively clean and your business is strong financially, you may see a lesser increase. Regardless of the code your
business falls within, you must begin planning now for these increased charges. It is also important to note, as I discuss below, that the pure premium rate doesn't necessarily correlate precisely with the premium you pay. There are a number of variables insurance companies use to affect the premium calculation.
This is very important news for contractors as this will
increase the cost of doing business and therefore requires management to
revisit the estimating process. The work
you are bidding on now will be bearing this significantly higher cost. You do
not want to be caught bidding work with 2011 rates only to see your backlog in
2012 experience profit fade relating to the higher actual costs of insurance
you will be facing.
It is important to keep in mind that although pure
premium rates are an input/base in determining workers’ comp rates, they do not
account for a number of costs borne by an insurance company. These costs include administrative/overhead
costs and therefore the premium rates that a business pays are generally higher
to cover those costs as well. There may be ways to mitigate the impact of this increase based on your particular circumstances. I would urge you to contact your insurance broker to discuss as he or she can help by being proactive. It is also good to include other trusted advisors, such as your CPA and bond agent, in the discussion as well.
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