TO: Members of the Bureau

FROM: Donna Knepper

RE: Wisconsin Exception

"Minimum-Minimum Premium" Rule

The Bureau has been asked to recirculate the information released in General Circular Letter 361 dated March 10, 1993. The Minimum-Minimum Premium Rule was amended since then, but the examples still apply.

"Over the years, the so-called "Minimum-Minimum Premium" rule, found on Wisconsin Exception Page E2 19 in the Manual, has generated more questions and caused more confusion than perhaps any other rule in our State. This rule has been mandated by the Office of the Commissioner of Insurance, and is intended to deal with situations where little or no worker’s compensation exposure develops under a policy.

To understand the Exception, it is first necessary to review the basic manual rule, specifically Rule F. paragraph 5 Rule VI. E. 6. Found on page R-14 29 in the basic manual. This rule reads, in part as follows:

"Adjustment Upon Audit

The minimum premium is subject to final adjustment and shall be determined upon audit only on the basis of those classifications developing premium. If the final earned premium is less than the minimum premium determined upon audit, that minimum premium shall be charged. If no classification develops premium, the premium charged shall be the minimum premium of Code 8810. For canceled policies refer to Rule X."

The Exception on Wisconsin Page E2 19, amends the basic rule, in part, as follows:

"Adjustment Upon Audit

If upon audit it transpires that the circumstances upon which the minimum premium was originally determined have become changed during the policy period, the minimum premium appearing in the policy shall be amended in the manner indicated and the audit shall be made in accordance therewith. In the event that the designated minimum premium is greater than 20 percent of the earned payroll, then the minimum premium shall be 20 percent of the earned payroll, buy not less than the applicable expense constant.   This amount is not subject to pro rata or short rate cancelation.

In the event of mid-term cancelations, this rule only applies if it produces a lower minimum premium than would be produced under Rules X-B. or X-C. of this manual.

The following examples may help illustrate how the rule and the Exception work in tandem:

(NOTE: In all examples, the applicable manual rate is $10.00, and the applicable minimum premium shown on the Policy Information Page is $800 $850, which is the current maximum in Wisconsin.)

1. The Final Audit develops $10,000 in earned payroll. The final premium is 10.000 X $10.00 divided by 100 or $1,000 plus the expense constant of $160 $180 for a total of $1,160 $1,180. Neither minimum premium rule applies, as the audited premium exceeds the minimum.
   
2. The Final Audit develops $5,000 in earned payroll. The calculated premium is 5,000 X $10.00 divided by 100 or $500 plus the expense constant of $160 $180 for a total of $680 which is less than the minimum premium. The Wisconsin Exception refers to 20% of earned payroll or .20X $5,000 for a total of $1,000. Since $1,000 is greater than the policy minimum shown of $850, the Wisconsin Exception does not apply, and the $850 Minimum is applicable under Basic Manual Rule F., paragraph 5.
   
3. The Final Audit develops $3,000 in earned payroll. The calculated premium is 3,000 X $10.00 divided by 100 or $300 plus the expense constant for a total of $460 $480. The Wisconsin Exception calculation is 20% of $3,000 or $600, which is less than the $850 policy premium. Therefore, the Exception applies and the minimum premium charged is $600.
   
4. The Final Audit develops no earned payroll. Since 20% of 0 is nothing, the Wisconsin Exception obviously applies, and since the minimum charge under the Exception is the Expense Constant, the actual minimum charged would currently be $160 $180.

Example 4 is, by far, the most common situation, as a number of risks, primarily contractors, often buy policies they are not required to purchased as they have no employees, solely to obtain a Certificate of Insurance. Since there is no loss exposure in this situation, the Office of the Commissioner of Insurance believes that the Expense Constant is adequate payment to the carrier for issuing the policy. Similar arguments are used for employers with very small payroll.

Any questions regarding this Wisconsin Exception should be forwarded to this Bureau. Member carriers are asked to circulate this bulletin to all company employees responsible for the determination of final earned worker’s compensation policy premium on Wisconsin exposures."

Remember, in any of the above examples, if the policy is canceled mid-term, the Minimum Premium Rule applies only if it produces a lower premium than would be produced under Rules X-B. or X-C.