Schedule Rating Abuses in Workers Comp Insurance

 I was recently reminded, by a new case, of an element of Workers Compensation insurance pricing that I haven't written much about lately: Schedule Rating.

On a Workers Comp policy, Schedule Rating sometimes shows up under different names, like "Schedule Mod" or "Schedule Debit" but it's all the same thing. It's a discretionary premium adjustment applied by an insurer that can either reduce premium (a Schedule Credit) or increase premiums (a Schedule Debit).

And unlike the Experience Modification Factor, it isn't calculated by a third party rating bureau like NCCI. But Schedule Rating is a multiplier, like the Experience Mod. But it isn't mandatory, the way an Experience Mod is (for employers above a certain minimum size, at least). And it isn't calculated using a strictly-defined formula.

Instead, it's calculated using loosely defined broad categories, things like "employer attitude towards safety" or "unique characteristics of this insured". So there's lots of room for judgement calls by the insurance company. Insurance companies still have to file with insurance regulators the particular broad categories they will use for Schedule Rating, along with Minimum and Maximum percentages (for example, a 50% Maximum would mean the highest Schediule Rating could be a 50% discount or a 50% surcharge.

And that Maximum is made up of six or seven categories, each with its own sublimit. So the category for "management attitude towards safety" might be allowed 5% of the total Max. Some other categories typically would allow for 10% of the total. and all of the categtories together would add up to the Maximum, whatever it might be in that state (typically 50% or 45% but sometimes lower).

So where do the abuses come into play?

They arise because many insurance companies play fast and loose with Schedule Rating factors, using them as pricing adjustments that are not really based on the specific broad categories filed with regulators.

There is one particular insurer we have observed (who shall go nameless here) that seems to abuse Schedule Rating more regularly than others. This insurance company regularly and blatantly uses Schedule Rating as a pricing factor--using Schedule Rating routinely as a way to achieve the particular premium amount their underwriters have determined they desire for a particular insured. The underwriters first calculate the dollar amount they want, and then work backwards from that, using Schedule Rating to make the number come out where they want it.

This insurer will then, if challenged, produce some retroactively created worksheet that manages to come up to the already-determined amount of Schedule Rating, creatively justifying the total by arbitrarily filling in the blanks of specific categories (without getting particularly specific).

This entirely subverts the nature of Schedule Rating that has been sold to insurance regulators, of course, but no one ever examines this unless someone (like me) comes along to challenge it.

I mentioned a new case, at the start of this blog post, and let me illustrate my point with some details from it.

One one year's policy, the insurer applied no Schedule Rating at all in the premium calculation. But on the next year's policy, substantial Schedule Rating surcharges were applied. This rather begs the question, what changed, at this particular insured employer, from one year to the next--and those alleged changes would have to be documented in the insurer's files and be shown to fall into the specific Schedule Rating categories filed with regulators by this insurance company.

Did I mention that this particular client of ours has been insured by that particular insurance company we have already identified, from past cases, as being guilty of routinely abusing the Schedule Rating system?

So we are, of course, in the middle of challenging these Schedule Rating charges, on behalf of our client, as these SR surcharges amounted to a lot of money on the audited premium.

The game is afoot, as my favorite fictional detective used to say. But a word to the wise, if your policy includes Schedule Rating surcharges, you might want to ask your insurance company to justify them.

Just sayin'.