Because all businesses are distinct, there is always some variation among them and, theoretically, all employers in a state could be arrayed in a continuous spectrum from the least to the most hazardous. Thus, the maximum number or classifications would equal the number of employers in the state, with one classification for each employer. However, few of these classifications would produce statistically reliable experience for ratemaking purposes.
As opposed to this extreme, workers compensation insurance uses approximately 600 industrial classifications. This system groups employers involved in the same kind of business. Generally, similar businesses have similar exposures to occupational injury and disease, even though no two businesses are identical. This grouping enables us to adequately predict premiums and losses for ratemaking purposes.
Although the classification system subdivides insureds according to product, process, operation, kind and character of business, etc. we recognize that the insureds can differ in a variety of ways: how the operation is performed, the manner in which the product is manufactured, and the implementation and operation of safety programs, to name a few. These factors will all affect the propensity for an injury to occur. To reflect these differences and to encourage the safe operation of a workplace, an Experience Rating Plan is applied.
The elimination and introduction of classifications is based on studies conducted by rating organizations and insurance carriers interested in a particular industry or classification problem. In general, the introduction of a separate classification requires a group of employers with similar methods of operation, or a group producing a common product which can be distinguished from other businesses. The group of employers also must be sufficiently large to produce payroll and losses which will be statistically valid for ratemaking purposes.
To consider a new code, we must determine the total payroll for these operations within a given state. After the payroll is determined, a judgment can be made as to whether or not a new classification should be established.
The creation of a new classification code is not an arbitrary decision. It requires in-depth industry and actuarial research. To consider a new code we would desire the following information:
Detailed description of operations, including:
-materials & equipment utilized
-process or method exercised to generate the product or service
-end product or service
-current industry "production" trends or insights
Explanation as to why the current classification is inadequate or inappropriate
Proposed scope of proposed classification
Reasons for requesting the new classification
Frame of reference (other companies with similar operations) or name and address of local/national associations that represent this industry.