(December 2020)
The rates used to develop the premium include loads for inspections, loss control, risk management meetings, policy issuance, and other costs. The rate is then multiplied by the remuneration to develop a premium. Because certain administrative costs are unaffected by increased remuneration, a discount should be applied to reflect rate redundancy. The National Council on Compensation Insurance, Inc. (NCCI) developed a premium discount factor that is applied at certain premium thresholds.
WC 00 04 06 A–Premium Discount Endorsement is attached to WC 00 00 00 B–Workers Compensation and Employers Liability Insurance Policy to explain how the premium discount is applied to the eligible premium. The endorsement schedule states the amount of discount as a dollar or premium amount or as an average percentage of the total premium.
This endorsement explains how the Premium Discount Rule in the Basic
Manual of Workers Compensation and Employers Liability Insurance applies. One
key component is that premiums from multiple policies can be combined, but
those policies must be listed on the endorsement schedule.
The estimated premium from all covered policies
are combined and entered, and the average discount percentage is then
determined. The final premium discount calculations are based on the insurance
company's manuals and the premium basis at the time of audit.
Note:
The premium discount is inapplicable
under a retrospective rating plan.
Proper use of the Premium Discount Endorsement depends on the type of policy and the state or states involved. The Basic Manual for Workers Compensation and Employers Liability Insurance explains how the premium discount factor applies under different circumstances and in specific situations. It also provides some examples. Certain states have rules exceptions, additional rules, or both. The general rules are summarized below.
Single State Policy
The premium discount is determined by applying the discount percentages on the state rate pages to only that part of the total standard premium that exceeds the threshold amount.
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Example: Sally’s standard premium is $25,000. The premium discount threshold in her state is $5,000. As a result, the discount is not applied to the first $5,000 of premium. |
Multi-State Policy
The single state method is used if all states have the same thresholds and premium discount.
If the states’ thresholds and discounts vary, a ratio must be developed by dividing each state’s premium by the total of all standard premiums. The state ratio is then multiplied by the premium discount factor and then times the premium subject to the discount. The sums are then added together.
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Example: Sally has premium in two states with different rates. State X develops $25,000 in standard premium. State Y develops $35,000 in standard premium. This means that the total standard premium is $60,000. State X’s ratio is $25,000/$60,000 = 41.7. State Y’s ratio is $35,000/$60,000 = 58.3. Both states have a $5,000 threshold. State X gives a 9.5% discount for the next $95,000. State Y provides a 2% discount for the next $95,000. The discount is calculated as follows: (.095X.417 x$55,000) + (.02X .583 X $55,000) = $2,179 + 641 = $2,820. |
Note: This process changes when retrospective rating is used.
Multiple policies may be combined when developing a premium discount. In order to combine policies, all policies must be issued to and have the same named insured, and it must be issued by insurance companies that are all under the same management. This applies to all such policies unless the named insured instructs the companies that it does not want to include certain policies.
One very important consideration is that all policies that are combined for a premium discount must have the same effective date. This means that some policies may have to be cancelled and rewritten to obtain a better premium discount.
The premiums for multiple legal entities covered under a wrap-up can be combined to develop the premium discount, but only if all are insurance companies are under the same management. Determining the entities that can be combined depends on the particular wrap-up relationships.
This does not apply to policies subject to retrospective rating.