Our last article shared helpful information about how Workers’ Compensation functions and why most U.S. states require workers’ comp insurance for all employers.
In this article, we answer the following questions to help small business owners understand how workers’ comp premiums are calculated:
● What Factors Contribute to Figuring Workers’ Comp Costs?
● What are Workers’ Comp Class Codes?
● How Can I Find My Experience Modifier?
What Factors Contribute to Figuring Workers’ Comp Costs?
Workers’ comp rates are typically a fraction of every $100 of payroll, but it’s not the same for every business.
The work hazards associated with a job contributes to the cost of workers’ comp. Some jobs are more dangerous than others; thus, injuries sustained in certain lines of work can be more severe.
For instance: a contractor in a construction company faces a higher risk of work hazards than a sales associate in an ice cream store.
If an employee works in multiple roles with varying risk factors, categorizing labor according to the various class codes can help employers control insurance costs.
There are a number of factors that contribute to figuring workers’ comp costs. These include:
● Location - The business region could affect the cost. Workers’ comp is regulated at the state level, so your insurance rate will rely partly on the state where the work is performed.
● Type of Work - The work and risk factor also determine workers’ comp premium, which is calculated from the class codes.
● Payroll - The gross total payroll of each employee also figures in to your business's workers comp cost.
● Claims History - Record of insurance claims made over a specified period of time in the past.
What are Workers' Comp Class Codes?
Workers’ comp class codes are standardized codes insurance companies rely upon to categorize work based upon estimated risk. Class codes are typically four-digit numbers assigned to businesses based on the type of industry.
To look up the class code that may apply to your business, you can perform a search here: Online List of NCCI Codes & Phraseology by State | Class Codes.
How Can I Find My Experience Modifier?
If your business is large enough, the experience modifier, also commonly referred to as eMod, is used as an indicator of how your organization’s workers’ comp claims experience compares to other businesses similar in size and types of jobs.
Your eMod usually takes into account three years of claims history and is often calculated by the National Council on Compensation Insurance (NCCI) or your state rating bureau. If you are interested in learning more about the experience modifier, check out the ABCs of Experience Rating from NCCI.
How Is Workers' Compensation Premium Calculated?
Although policies vary by state, NCCI creates policy forms and rules for premium computations for most states. The state bureau outlines the rate and baseline cost of workers’ comp premium by gathering and evaluating hazard data and compensation claims. These data could be patterned differently depending on the claims, but the rates are class code specific statewide.
Once you have your employee payroll, class code and eMod, you are much closer to being able to calculate your workers’ comp premium. The formula for workers’ comp calculation is:
In Summary
As a small business owner, you should have a strong understanding of the factors that contribute to your workers’ comp premium and how to apply the formula used to calculate them.
To learn more about workers’ comp insurance, you can check out our other blogs, guides and videos online at www.AmeriTrustCONNECT.com.
If your policy renews in the next 90 days, we encourage you to get a competitive quote online now — no phone calls or paperwork required. At AmeriTrust CONNECT, we help small business owners like you get covered the SIMPLE.FAST.DIRECT. way.
This workers' compensation blog is not intended to be exhaustive, provide insurance counseling, nor should it be construed as legal advice. Readers should contact their insurance professional or an attorney for advice.
