Good news for Florida employers! Workers’ compensation insurance premiums are going down in 2018. The Office of Insurance Regulation approved a statewide overall premium decrease of 9.8 percent. This should provide welcome relief, particularly after last year’s 14.5 percent increase. The premium reduction for new and renewal policies started January 1, 2018.

Why are premiums going down?

Last year, the Florida Supreme Court decided two cases that were expected to increase workers’ compensation costs. The Office of Insurance Regulation responded by approving a 14.5 percent rate increase, but the actual impact of these cases turned out to be less than initially projected. Other marketplace factors also contributed to the premium reduction, including:

  • Reduced assessments;
  • Increases in investment income;
  • Declining claims frequency; and
  • Lower loss adjustment expenses.

When will premiums go down?

Most employers did not see lower premiums on January 1st. That’s because the premium calculation for an existing policy will not change until the policy renews in 2018. This means that premiums for policies that renew early in the year will go down before those renewing later.

Rather than wait, some are asking whether they can simply cancel their current policy and replace it with a new one that has an earlier effective date. However, this isn’t really necessary for most employers. Remember, those with early renewal dates are not saving more, they’re just saving sooner.

For those that simply don’t want to wait, this course of action may ultimately lead to a premium increase in 2018. Before deciding to cancel and rewrite a worker’s compensation policy, employers must consider a number of factors, such as:

Experience Modification. A new policy means a new Experience Modification Factor (“Experience Mod”). Experience Mods, which are used to make sure premiums reflect an employer’s actual loss experience, are calculated by comparing an employer’s loss history with that of similar employers operating in similar industries. A better-than-average loss history, typically over a three-year period, means a lower Experience Mod and lower premiums.

Insurance companies look at an employer’s loss history during a specific experience period, which can range from less than 12 months up to 45 months. The experience period is based on the policy’s effective date, so a different experience period will be used to calculate the Experience Mod under a new policy. If this new experience period covers new claims, your premiums will go up.

Short-Rate Cancellation Penalty. Insurance companies impose a penalty to discourage early cancellations. A short-rate cancellation lets the insurance company keep a larger percentage of the unearned premium if the policy is terminated before the normal expiration date. The manner in which the penalty is calculated often varies by insurance company and policy form. Depending on the circumstances, the penalty may be substantial and must be considered in any cost-benefit analysis.

Dividends. Some insurers offer policyholder dividends as an incentive for employers to implement safety programs that eliminate or reduce claims. The opportunity to collect a dividend, which is essentially a return of premium, may be lost if the policy is cancelled early.

Employers must also consider the time, effort and inconvenience of getting a new policy (applications, inspections, underwriting requirements, etc.). Some insurance companies may refuse to cancel and rewrite a policy, so changing the effective date would mean changing insurance companies.

The decision to cancel and replace your workers’ compensation policy needs to be based on more than just wanting next year’s premium reduction sooner than later. For most employers, this benefit will not be worth the expense.