Tuesday, November 15, 2011

Workers' Comp Pure Premium Rate To Rise 30% in 2012

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.

Although the increase effective January 1, 2012 will be significant, it bears noting that these rates are still approximately 50% lower than the rates effective July 2003 (when it was an average of $4.80 per $100 of payroll).  That is little solace during these tough times however knowledge is power… Knowing the rates are rising provides you the ability to keep ahead of the curve.

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