That’s a really good question! Like all things related to insurance, the answer is complicated. When it comes to who sets workers’ comp rates, states fall into one of three categories.
In the majority of states, the state's department of insurance and individual insurance carriers combine to set workers’ comp rates. The state starts by setting a baseline rate. Each insurance carrier applies a Loss Cost Multiplier (LCM) to tweak the rate. The final rate is approved by the state.
A smaller number of states are more regulated where the state sets fixed rates and carriers can adjust premiums slightly by applying debits and credits.
Finally, four states—North Dakota, Ohio, Washington, and Wyoming—have monopolistic control, with the state government setting rates and acting as the sole workers' comp insurance carrier.
Let's explore each category in more detail to see how they impact the rates that businesses ultimately pay for workers' compensation insurance.
In carrier-set states, the insurance market is competitive, and carriers have the flexibility to set their own rates to a certain degree. The state's Department of Insurance typically releases advisory loss costs, which serve as the base rates.
Insurance companies then apply their LCM to these loss costs, which adjusts the base rate to cover their costs and the risks they take. This LCM must be filed with and approved by the state's Department of Insurance to ensure that it is within normal range.
This model encourages insurance carriers to offer rates that are attractive to businesses while maintaining enough margin to cover the inherent risks of workers' compensation claims.
In states like these, it can really pay to shop around and get multiple quotes for an insurance policy. Since every company is setting their own rates, they can vary greatly from each other.
For example, in Georgia, the competitive market fosters a diverse range of rates and coverage options for employers, allowing them to shop around for the best fit for their company's needs.
Some states take a different approach, with the government setting fixed rates for workers' compensation insurance. In these states, individual carriers must adhere to the rates established by the state.
While insurance companies in these states do not have the authority to apply an LCM, they are often granted the ability to adjust the state-set rates by offering credits (discounts) or debits (surcharges). These adjustments can be significant, sometimes allowing for variations of up to 25% to reflect an individual employer's safety record, claims history, and other risk-related factors.
For example, Florida operates under a state-set rate system but permits insurers to apply debits or credits, giving businesses the potential to reduce their premiums through proactive risk management and safety programs.
The third category is the most straightforward but the least common: monopolistic states. In these states, the state government itself is the sole provider of workers' compensation insurance, and private insurance carriers are not allowed to offer workers' comp coverage.
The four monopolistic states are North Dakota, Ohio, Washington, and Wyoming. These states set and control all workers' compensation insurance rates, and employers must obtain coverage directly from the state fund. If you live here, sorry! We won’t be able to help you.
The monopolistic system simplifies the process of obtaining workers' compensation insurance since there is only one source for coverage. However, it also means that employers have no choice of carrier and limited options when it comes to pricing and policy features. While some businesses may find this system less flexible, others appreciate the straightforwardness and stability it can provide.
Whether you're in a carrier-set, state-set, or monopolistic state, staying informed about who sets workers' comp rates and how they are determined will empower you to make better insurance decisions for your business.
Our agents at Kickstand Insurance can help you understand your state's regulations, optimize your coverage, and find the most competitive rates available. Start an instant quote here to connect with our team of expert insurance advisors.
Note: The information provided in this blog is intended for general informational purposes only and is not a substitute for professional legal or insurance advice. Laws and regulations regarding workers' compensation insurance are complex and vary by state and by specific circumstances. Therefore, readers are encouraged to consult with a qualified legal or insurance professional to obtain advice with respect to any particular issue or problem they might have.
Mordechai Kamenetsky, co-founder and lead agent of Kickstand, is recognized as an expert in workers' compensation. He is passionate about helping small businesses manage risks and lower their workers' comp costs. In his articles, he educates readers and clients on the intricacies of workers' comp insurance.