How To Calculate Workers’ Compensation Premiums: What Factors Go Into It?

A workers’ compensation guideline protects businesses from lawsuits and financially protects injured or sick workers. The calculation of workers’ compensation premiums depend on many factors like the company’s payroll, industry, claims history and so on.

What Are Workers’ Compensation Premiums?

Workers’ compensation premiums are the amount a business pays for its insurance policy. The premium covered the medical expenses and lost wages an employee may incur from an injury or illness while on the job. In addition to legal fees, the premium covers other claim costs. Businesses should carry workers’ compensation insurance to protect their employees and their businesses.

What Factors Determine The Cost Of Workers’ Compensation Premiums?

Listed below are some factors considered when determining workers’ comp premiums.

How To Calculate Workers' Compensation Premiums - What Factors Go Into It 1

Types of employees

Different jobs pose different levels of risk, so employees are often divided into other groups. It helps insurance companies determine the proper premium rate for different job types by assessing the level of risk involved. For example, an employee in an office may be at a lower risk of injury than one in manufacturing or construction. Thus, office employees may pay a lower premium than construction workers. Office workers usually have a much lower risk of injury because their tasks are not labor-intensive. Due to this, the insurance company can charge them a lower premium.

The payroll process

A company’s payroll sometimes determines workers’ compensation insurance premiums. Because bigger businesses have more workers, workplace accidents are more likely. Premium rates are calculated as a percentage of payroll; hence, larger companies may pay higher insurance premiums.

Also Check: What Is The Maximum Amount Of Compensation In A Personal Injury Case?

Previously filed claims

Having a good claim history can affect workers’ compensation premiums. Insurance companies predict future claims based on a company’s claims history. A business with a frequent and expensive claims history may be assessed a higher premium. Taking precautions to prevent workplace accidents can reduce this risk. Implementing safety procedures, conducting regular inspections, and offering workers safety training can help. It does not mean a business cannot get coverage if they have a history of frequent and expensive claims. Many insurance companies specialize in high-risk industries and may charge a higher premium for coverage.

The industry sector

Workers’ comp premiums vary based on a company’s industry. Manufacturing and construction have a higher risk of workplace accidents and may be assessed a higher premium. Construction workers are more likely to fall, get hit by falling debris, and sustain further injuries when using heavy machinery and equipment. Due to this, construction companies may pay a higher rate for workers’ compensation insurance than businesses in lower-risk industries. Also, The risk of injury can be reduced by on-the-job training and safety equipment for construction workers.

Also Check: Types of Life Insurance Policies: Which is Right for You?

Geographical location

A company’s location can influence workers’ compensation insurance costs. States have different workers’ compensation rules and regulations, and some have more expensive insurance. Workers’ compensation insurance costs can vary by state based on the industry, the number of employees, and other factors. Moreover, Some states charge additional surcharges for specific industries.

Plans and programs for safety

Workers’ compensation premiums may be lower for businesses with safety programs, and insurance carriers discount companies with vital safety records and measures to reduce workplace injuries. Employee injuries are less likely to occur at companies with safety programs, such as regular safety inspections, proper training, and enforcement of safety rules. This factor is taken into account by insurance carriers when calculating premiums.

Experience Modification Factor

Depending on a company’s claims history, the experience modification factor (EMF) modifies the premium. The EMR compares actual claims with expected claims based on industry averages. If a company has many claims compared to other businesses in the same sector, its EMR may be higher than 1.0. The company will have a higher premium. As the insurance company must cover the claims, the higher EMR indicates that the company will have more shares in the future. The insurance company needs to charge a higher premium to cover these claims.

Also Check: How To Choose The Best Long-Term Life Insurance Policy?

How To Calculate Workers’ Compensation Premiums?

Companies can determine their workers’ compensation premiums using their EMR, payroll, job classifications, and other relevant factors. In most cases, it includes:

How To Calculate Workers' Compensation Premiums - What Factors Go Into It 2
  • NCCI or a state rating bureau assigns a classification code to each profession or job role. This code determines premium rates based on the level of risk involved in the job.
  • Determine the premium by calculating the total payroll paid to all employees in each classification code during the policy period. It includes salaries, commissions, bonuses, and other compensation.
  • Calculate the premium using the rate assigned to that code by the insurance provider once you have the classification code and payroll amount. Rates are usually expressed as a percentage of payroll.
  • An experience modification factor adjusts the premium for the employer’s claims history. A good safety record with few or no claims will reduce the premium, and a high number of shares will increase the premium, conversely.

To calculate the premium, multiply the payroll amount by the rate and apply relevant experience modification factors.

Here’s An Example Of How To Calculate The Workers’ Compensation Premiums

How To Calculate Workers' Compensation Premiums - What Factors Go Into It 3

Assume that a company has employees in a classification code that pays 1.25% and has a payroll amount of $500,000.

They have an excellent safety record with few claims with a 0.9 experience modification factor.

By multiplying payroll by the rate, we can calculate the premium:

$500,000 x 0.0125 = $6,250

As a next step, we would adjust the premium by 0.9 experience modification factors:

$6,250 x 0.9 = $5,625

The final premium for this business would be $5,625.

Also Check: 7 Things That Can Impact Your Car Injury Claims

In Summary

Several factors affect the cost of workers’ compensation insurance premiums. The factors include employee classification, payroll, claims history, industry, location, safety programs, and experience modification. Understanding how these factors affect insurance costs can help employers create a risk-free workplace.


Image by Gerd Altmann and Azam Ishaq

Discover more from InfoToHow

Subscribe now to keep reading and get access to the full archive.

Continue reading