Alabama Property and Casualty Practice Exam

Which factor has the greatest impact on Workers Compensation rates?

1. Severity of injuries

2. Frequency of claims

3. Employee turnover

4. Industry type

The correct answer is: Frequency of claims

The frequency of claims is a critical factor in determining Workers Compensation rates because it reflects how often employees are getting injured or ill in the workplace. Insurance companies assess risk based on statistical data, and when a company has a higher number of claims, it indicates a trend of workplace incidents that can lead to higher costs for the insurer. More frequent claims usually mean the potential for greater payouts, which in turn drives up the premiums charged to the employer. Therefore, a higher frequency signals to insurers that the business may present a greater risk, leading to increased rates to cover potential claims. While other factors like the severity of injuries and industry type can also influence rates, the frequency of claims tends to be a more immediate indicator of risk. High severity injuries can lead to significant individual claims, but a company with many minor claims can still see its rates rise due to the sheer volume of incidents. Employee turnover can affect the overall safety culture, but it typically has a less direct and immediate impact on pricing compared to the frequency of actual claims being submitted.