HD3 - Report of the Virginia Workers’ Compensation Commission Studying House Joint Resolution 11 (HJR 11, 2022)

Executive Summary:

During the 2022 legislative session, the Virginia House of Delegates proposed HJR 11 requesting the Workers’ Compensation Commission (WCC) study the practice of charging workers’ compensation premiums on bonus pay, vacations, and holidays. The WCC enlisted the National Council on Compensation Insurance (NCCI)(*1) to assist in its completion of this study.

• The elimination of bonus, vacation and holiday pay from premium would necessitate a significant loss cost level increase in order to maintain loss cost(*2) adequacy for Virginia’s workers’ compensation system.

• Any reduction in premium would have to be accompanied by a corresponding reduction in medical and indemnity benefits for Virginia’s injured workers to avoid loss cost inadequacy.

• The change in the definition of payroll as described in HJR 11 would reduce the premiums for certain employers while increasing premiums for other employers. This could create a scenario in which some employers subsidize others.

• A thorough review of the Basic Manual rules concerning payroll and its components determined that none of the 38 NCCI states excludes holiday, vacation, or bonus pay as described in HJR 11. Washington, a monopolistic state and not in NCCI’s jurisdiction, is the only state that does not use payroll as a premium basis. It uses hours worked.

• Premium collected could be reduced by 10.2%. Consequently, any tax revenue billed, recorded, and collected by the Commission predicated on collected premium would be reduced by that same amount. This would adversely impact the Commission’s Administrative and Uninsured Employer’s Funds’ budget and available resources and risk insurer participation in the Virginia market if they were not allowed to collect premium that is actuarily sound and responsive to the insured exposure.

• The Virginia Workers’ Compensation Commission estimates that 13% of the Commission’s tax revenue is from state and local self-insured entities. (See footnote 7.)
(*1) NCCI is a licensed advisory rating organization authorized to make recommended loss cost/assigned risk rate filings on behalf of workers’ compensation insurance companies in Virginia. NCCI maintains the Basic Manual for Workers’ Compensation and Employers Liability Insurance that contains rules, classification descriptions, rates/loss costs for each classification, and state-specific exceptions for writing workers’ compensation insurance.
(*2) In general, a loss cost represents a provision for losses and loss adjustment expense per $100 of payroll for each classification. Loss costs are not final rates because they do not include provisions for remaining expenses (including production expenses, profit, contingencies, etc.) of an insurer. Loss costs are the foundational factor in calculating final premium.