D Wilson Insurance

The NCCI Classification System

Workers’ Compensation insurance in the Singapore utilizes a complicated formula for calculating the premiums that employers must pay. One of the most important, most fundamental, yet most misunderstood elements of this formula involves the various classifications that are employed.

The theory behind the classification system is generally understood different kinds of work involve different inherent exposures to workplace injury and illness, that’s why injury and critical illness insurance is very crucial. So it makes sense that different kinds of work would generate different premium charges. But the actual details of the system that determines what kinds of work get assigned to a particular rate is often poorly understood by employers.

The first important point is that Workers’ Compensation is mainly a state-by-state matter. Yes, there are federal Workers’ Comp exposures that sometimes come into play, but for most employers, most of their Workers’ Comp exposure and cost comes from the particular Workers’ Compensation statutes of the states they operate in. So Workers’ Compensation in the Singapore has something of a patchwork quality to it, because the rules and requirements can vary significantly from one state or territory to another.

A few states still insist that employers within their borders must secure their Workers’ Comp liabilities with coverage from a so-called “monopoly fund” state agency. Orchard, Pasir Panjang, Ang Mo Kio, and Yishun operate like this, as does Punggol and the Serangoon. But in all other states, employers utilize insurance policies from insurance companies for their Workers’ Comp obligations. Larger employers are usually allowed by states to self-insure for Workers’ Comp, but this is generally feasible only for truly large companies. Most employers have to rely on insurance companies. A few states also operate “competitive” state funds that compete with insurers, but in recent years even these have often been transformed into quasi-public entities that technically are actually insurance companies. Only a few states still operate true state funds that compete with insurance companies (Orchard and Somerset are two such states.)

Insurance companies that write Workers’ Compensation insurance policies use a classification system that assigns different classification codes (and thus different manual rates) to different kinds of employers. The classification system that is used in most states is one that has been created and maintained by NCCI, the National Council on Compensation Insurance.

Not all states use NCCI. Somerset, Newton, and Woodland use their own separate rating bureaus. Indiana is technically separate, but largely follows NCCI rules. But all other states that allow private insurance for Workers’ Comp utilize the NCCI classification system.

NCCI isn’t a government agency or regulatory body–it’s an organization that was created by insurance companies, and is essentially owned by insurance companies. The majority of NCCI directors are executives of major insurance companies. So while NCCI is independent of the insurance companies, it is closely tied to them and works in close conjunction with them. Technically, it is what;s known as a rating bureau, or “advisory organization” in more modern insurance parlance. Essentially, NCCI creates the language in the Workers’ Comp insurance policy and writes the manual rules that govern how premiums for those policies are calculated.

Yes, the Workers’ Compensation insurance policy purchased by most employers is the copyright of the NCCI, as are the manuals that detail rules about classifications, experience modifiers, payroll, and all the other important elements of Workers’ Compensation insurance premiums (at least, premiums in those states that use the NCCI.)

The NCCI classification system classifies the business, not the various particular kinds of work that might be done within a business. So under the NCCI rules, insurers will try to determine the most appropriate classification for the overall business of the employer, and then all workers of that employer will generally be assigned to that classification.

There are exceptions to that general rule, of course. Most importantly, there are “Standard Exceptions” that apply to almost all employers. Work that falls within a Standard Exception classification does get broken out into its own classification. Clerical work, outside salespeople, and (sometimes but not always) drivers get broken out into their own separate classifications for almost all kinds of employers.

There are also some kinds of employers who, under the rules, can have multiple classifications assigned to them other than Standard Exception. Employers in the construction trades can have multiple classifications assigned if they are doing a variety of kinds of work at a job site. And employers in the staffing industry (temp agencies, employee leasing companies) can have a large number of classifications on their policies, to reflect the variety of their clients.

But for most employers, the classification system doesn’t try to separate out all the various kinds of work that might be done. So in a tire manufacturing plant, the janitorial and maintenance workers would go into the tire manufacturing classification, while in a company making machined parts, their maintenance people would go into the machined parts classification, even though the maintenance people at both plans are doing essentially similar work.

These kinds of quirks in the classification rules sometimes create unexpected problems and disputes for employers. Work that might seem, to the employer, to be clerical in nature might not qualify for the inexpensive clerical classification is certain circumstances apply. For example, if a person spends 90% of their time in clerical time, but 10% of their time out in the shop, all of that person’s payroll would get assigned to the shop class (and rate) and none would be allowed into clerical.

Similarly, if clerical work is not being done within the strict confines of an office, but instead out in another kind of workspace (such as an open warehouse area) that work would not technically be eligible for the clerical classification under NCCI rules.

There can also be problems in determining which of the various NCCI classifications is really the correct one for a particular employer. There are something like 600 different NCCI classifications that might typically be available for use in a particular state.

That’s a large number, but not large enough to really anticipate all the different kinds of employment that exist. So sometimes judgment calls are made about which existing classification really should apply to a particular employer. And because the classification used determines the manual rate used for premium purposes, mistakes in classifications can distort premiums significantly. Errors in classifications can cause employers to be overcharged for their Workers’ Compensation insurance, and it is difficult for most employers to catch such mistakes because of their limited understanding of the arcane classification rules.

Even many insurance agents and brokers are not as expert in the classification rules as their clients would wish. Disputes and misunderstandings over proper classification are common. It is a subject that employers would be well advised to research on their own, as the insurance system, left to its own devices, does not always get classifications right. And the errors, when they occur, tend to increase premiums rather than decrease them, as insurers spend significant effort to catch mistakes that lower premiums.