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The Advanced Insurance Management ®
Glossary of Workers' Compensation
Insurance Terms
A B C
D E F G
H I J K L M N O
P Q R S T U
V W X Y Z
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ASO-Administrative Services Organization
- A third party firm that provides certain
outsourced human resources services such as payroll and tax
filings. These are similar to PEOs (Professional Employer
Organizations) but with a key difference: an ASO does not provide
Workers Compensation coverage to clients on a blanket bases as a PEO
does. An ASO may offer Workers Compensation coverage to clients on
an individual basis, particularly via so-called "Pay As You Go"
programs.
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- 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.
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ALE - Allocated Loss Expenses
- Insurance company costs for adjusting and
settling claims which can be identified with a specific claim. The
ALE 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.
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ARAP - Assigned Risk Adjustment Program
- An additional debit charge placed on Assigned
Risk policies (In
NCCI jurisdictions) with
experience modification
factors higher than 1.00. The notable exception is
Massachusetts, where ARAP stands for All Risk Adjustment Factor.
This is a surcharge that increases premiums over and above the
experience modifier, and in MA the ARAP can be levied against all
employers, not just those in the Assigned Risk Plan.
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- 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.
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- The final premium for the policy term, produced
by auditing actual payroll exposures.
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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.
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- Basic Classification
- The main Workiers Comp insurance classification for
an employer, other than Standard Exceptions. This may be
the Governing Classification (the one with the most
payroll). Since it is the business of the employer that
is classified, the Basic Classification is the one class
that best fits the overal business of the insured
employer. Sometimes more than one Basic Classification
may apply to an insured employer.
- Basic Manual
- A manual produced by NCCI which
details rules governing premium computation of Workers
Compensation insurance by NCCI member companies. This
manual or rules is filed with and approved by state
insurance regulators, and is binding upon member
insurance companies operating within states that use the
NCCI system.
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- Carve-Out
- An option allowed in California and
some other states, where an employer and the union for
the employer's workers agree to collectively bargain a
separate schedule of Workers' Compensation benefits that
differs from the statutory program imposed by the state.
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- Also called
Class Code. The workers' comp premium
rate commensurate with the risk associated with that workplace
exposure. For example, the classification code for an office clerk
should carry a significantly lower rate than the code for a roofer.
Misclassification is one of the
most common causes of overcharges.
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- In the Experience
Modification factor calculation, this is a factor applied to the
expected losses to determine what percentage of those expected
losses are to be considered as primary losses within the rating
formula.
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- 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.
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- 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.
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- 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).
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- In the
Experience Modification Factor, this is the amount of any single
claim that exceeds the cut-off point for inclusion as a primary
loss. In the NCCI experience rating formula, this threshold is
$5,000. In the formulas used by by other rating bureaus, the
threshold varies.
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Expected Loss Ratio (ELR)
In the Experience Modification Factor, ELR is a percentage
factor applied to an employer's past audited payroll to calculated what
the expected losses should be for a company of the same type and size as
the employer.
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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. Also called
Experience Modifier, or
Experience Mod.
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- 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.
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- 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.
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- 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).
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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.
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