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Workers' compensation rates stem from various factors, including industry risk, claims history and payroll costs. Here's what you need to know about workers' compensation, and how to keep costs down.
Workers’ compensation insurance isn’t just a legal requirement, it’s a necessary business insurance policy that could save you a lot of money if someone gets hurt on the job. Unfortunately, it’s often expensive. Workers’ compensation rates are affected by industry risk, your claims history and payroll costs. When you understand the factors affecting your workers’ compensation rates, though, it can help you keep costs down.
Workers’ compensation covers medical expenses and lost wages for employees injured in the workplace. It also covers rehabilitation costs, permanent disability benefits and death benefits for family members of workers who are killed on the job.
Insurance providers commonly use the following equation to determine workers’ compensation rates:
Class Code Rate x Payroll ÷ $100 x Experience Modifier = Premium
Let’s break down each variable in the formula:
Now that you understand each variable, let’s look at practical examples of how this formula works.
Here’s a closer look at the five primary factors that affect your workers’ comp rates, including the variables in the equation. Examining these factors in more detail will help you understand your rate and how you might be able to mitigate risks to reduce the cost of your annual premium.
Every job has risks, but some jobs carry higher risks than others. The class code rate is a variable that demonstrates a particular job’s insurance risk according to its industry work classification.
For example, an electrician working on remote towers is at higher risk than a customer service representative in a call center. Additionally, a roof installer is at greater risk of injury than a call software developer.
The industry work classification reflects a job’s risk factor via a class code rate. Most states use the National Council on Compensation Insurance (NCCI) codes to establish industry work classifications.
Insurance companies consider your payroll when determining your company’s risk. The more payroll you process, the higher your rate because your loss exposure is greater. In other words, the more payroll you have, the more risk there is to the insurance company.
Insurance companies divide the total payroll by 100 to determine the variable used in the workers’ comp equation shown above. For example, if you have $100,000 in payroll, you would divide that number by 100 to get 1,000.
An experience modifier, also known as the experience modification rate (EMR), reflects how your claims history affects your premium. The higher the EMR, the higher your premium will be.
All new businesses start with an experience modifier of 1.0 and will see fluctuations based on the ratio of their claims to overall industry claims. These numbers often vary from 0.75 to 1.25. However, it’s possible to see an EMR go much higher if your company has excessive claims.
In short, the more insurance claims filed, the higher your EMR and premium.
Rates for various work classes will fluctuate from state to state based on the state’s history and experience with claims and risk classifications. States that see many high-cost claims will generally see higher job class rates among employees. Regulators review rates annually and adjust them based on current data within the state.
The insurance carrier’s schedule of rates also affects your workers’ comp rate. When an insurance carrier is familiar with an industry, the rates are usually more competitive because the carrier wants to work with those types of businesses.
Even though many factors affect rates, the insurance carrier ultimately sets workers’ compensation rates. The same carrier will often have different rates in different states for the same type of business.
Carriers will use the NCCI data, state information and their own data to determine rates. This is why rates differ from carrier to carrier, and some are more competitive than others.
Even though rates vary by industry, every state has an average of workers’ compensation costs per $100 of payroll. This data gives you an idea of what you can expect when shopping for insurance rates. The National Academy of Social Insurance (NASI) maintains an annual report that lists the state averages.
Here’s a glance at the most and least expensive states by rate per $100 of payroll, according to NASI’s most recent data.
State | Rate per month |
---|---|
Wyoming | $1.83 |
Hawaii | $1.62 |
Montana | $1.48 |
Idaho | $1.42 |
South Dakota | $1.41 |
State | Rates per month |
---|---|
Texas | $0.41 |
Virginia | $0.56 |
Indiana | $0.60 |
Massachusetts | $0.61 |
Arkansas | $0.63 |
Utah | $0.63 |
For detailed information specific to your state, contact your state workers’ compensation board directly:
For a complete list of all state workers’ compensation offices, visit the U.S. Department of Labor’s State Workers’ Compensation Officials page.
Workplace safety compliance directly affects workers’ compensation rates. Companies with strong safety programs typically experience lower claim frequencies and reduced premiums.
OSHA’s Role in Workers’ Compensation Costs
The Occupational Safety and Health Administration (OSHA) sets and enforces workplace safety standards that significantly impact workers’ compensation costs. Key OSHA standards affecting workers’ comp rates include:
Like many business insurance costs, workers’ comp rates can be lowered with specific strategies and tips. Consider the following best practices to help keep workers’ compensation premiums down:
Without workers’ compensation insurance, your business may be subject to costly claims, lawsuits, state penalties and fines. Some states even have criminal penalties for companies without workers’ comp insurance. Take the time to understand how you’re being charged and look for ways to reduce the costs of this necessary expense.