You may be required to obtain workers' compensation insurance, but this necessary business insurance policy is often expensive. Workers' compensation rates are contingent on various factors, including industry risk, claims history and payroll costs. Understanding the factors affecting your workers' compensation rates can help you keep costs down.
What does workers' compensation cover?
Workers' compensation is known for covering medical expenses and lost wages for employees injured in the workplace. But workers' compensation coverage is more comprehensive than most people realize. Here's what workers' compensation covers:
- Medical care
- Lost wages
- Disability payments
- Rehabilitation costs
- Funeral costs
- Death benefits
How are workers' comp rates calculated?
Even though workers' compensation is regulated at the state level, the insurance industry has a commonly adopted equation to determine workers' compensation rates. This is the equation:
Class Code Rate x Payroll ÷ $100 x Experience Modifier = Premium
The class code rate is a variable that demonstrates a particular job's risk. When it comes to payroll, the more payroll you have, the higher your rate will be. The experience modifier reflects how your claims history affects your premium.
In the next section, we'll take a deeper look at these and other factors that determine and affect your workers' comp rate.
Factors that determine your workers' comp rate
The equation doesn't tell the whole story about the factors that affect your workers' compensation rate. State and insurance carrier concerns will also play a role.
Here's a closer look at the five primary factors that affect your workers' comp rates, including the specific elements in the equation. Taking a closer look at each of these variables will help you understand where your premium is coming from – and why your rate might be higher than another business in the same industry.
1. Class code rate (industry work classification)
Every job has risks, but some jobs are higher risk than others. The class code rate is a variable that demonstrates a particular job's 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 an office. Additionally, a roof installer has more risk of injury than a telephone clerk.
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.
Payroll is another component an insurance company considers 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 take the total payroll and divide it 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.
3. Experience modifier
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 then they'll see fluctuations based on the ratio of its 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 claims you have, the higher the EMR goes, thus increasing your premium.
4. State insurance factors
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 a lot of 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.
5. Insurance carrier factors
The last factor affecting workers' compensation rates is the insurance carrier's schedule of rates. Carriers generally have specific industries they're more experienced with, leading to what's called their "appetite."
When a carrier has an appetite for an industry, the rates are usually lower or more competitive since the carrier wants to work with that business type. The rates will be higher when dealing with an industry whose risk the carrier isn't keen to absorb.
Who sets workers' compensation rates?
Even though many factors affect rates, it's ultimately the insurance carrier that sets workers' compensation rates for businesses they write in the state. The same carrier will often have different rates in different states for the same type of business.
Carriers will use the NCCI data and state information – along with their own proprietary data – to determine rates. This is why rates are different from carrier to carrier, with some being more competitive than others.
How workers' comp rates vary by state
Even though rates vary from industry to 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.
Most expensive states for workers' compensation
|State||Rate per $100 of payroll|
Least expensive states for workers' compensation
|State||Rates per $100 of payroll|
How to keep your workers' comp costs down
Understanding how workers' comp rates are determined will help you implement strategies to reduce your premium. Consider these tips to help keep workers' compensation premiums down:
- Focus on safety. Companies that focus on safety and develop standard safety practices may be eligible for insurance discounts or credits. Formal safety programs with regular training, implementation and employee adoption will get the most credits.
- Classify workers. Make sure your employees are properly classified to get the best rate possible. While your industry may be a higher risk, not all employees will be classified the same. An office clerk will be classified based on their job duties, while an electrician will be classified on theirs. Misclassifying lower-risk employees will increase premiums, so double-check how the insurance company rates your staff.
- Establish an injury protocol. You can mitigate a claim's severity and cost with an injury protocol in place. When you have fewer claims or reduce the costs of claims, you can lower your rates by lowering your EMR.
- Implement a return-to-work program. Getting employees back to work means your insurance isn't paying for lost wages. This lowers the overall cost of claims and helps reduce your EMR.
- Talk to your insurance carrier. Ask your carrier what you can do to lower rates. There may be certain credits you're eligible for that you'll only learn about by asking. You may also be eligible for bundling discounts with certain carriers for having multiple policies.
- Shop around. Once you know your employees' job classifications, use that information to shop rates among carriers. Remember that some carriers have an appetite for certain industries, and usually offer more competitive rates in those industries. With classification codes, you can compare apples to apples to find the best rate possible.
Bottom line on workers' compensation insurance
Without workers' compensation insurance, your business is 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.