What is Workers Compensation and the Pay As You Go Option?

Workers compensation insurance is a type of “on the job” injury and wage reimbursement coverage mandated by NY State Law for any employer that pays wages for full or part-time employees. The insurance premium that an employer pays for workers compensation coverage is based on two important things.  The Class Code the insurance carrier assigns to the employer based on the risk exposure for possible future potential losses and the “estimated” amount of payroll at the time the policy is first requested or renewed. The classification differs with each employer based on underwriting criteria established over time and the insurance carrier’s own experience receiving premiums versus the payment of claims.

 

When a business requests an agent or broker to quote a comp policy they will ask how much payroll the business will run over the course of the policy year.  Once the workers comp classification code is determined and an estimated payroll amount is stated the insurance carrier can determine the so called “deposit” premium and release a quote.  It is important to note that the premium quoted is only an estimate based on the amount of payroll a business stated at the beginning of the policy inception date and is subject to an annual audit.  If the audit concludes that an “underpayment” occurred then the business would need to pay an additional audit premium as the coverage was provided but the exposure for potential loss was under estimated and needs to now “catch up” at the end of the annual policy period.

 

Pay as you go comp is an option that some insurance carriers are starting to offer to take the guess work out of workers compensation.  Pay as you go comp allows payment of premiums based on actual payroll instead of an up front estimate of what a business is going to run for payroll for the year.  The other benefit with pay as you go comp is that it allows your premiums to fluctuate throughout the year.  This form of payment makes the premiums higher during a company’s busy time of year and lower when a company has a lower payroll to report.

 

Workers compensation policies that don’t offer the pay as you go option can make cash flow for business’s difficult.   If a carrier does the end of year audit and a business has understated the amount of payroll they estimated for the policy then the carrier will need to collect what is owed on the policy.  This can lead to large unexpected payments to the insurance carrier.  The pay as you go option greatly reduces the risk of underpayment and for some insurance carriers the need to do the yearly audit.  Pay as you go comp is a great way to pay your workers premiums.