How Workers’ Compensation Rates Work

What does workers’ compensation cover?

Workers’ compensation is known for covering medical expenses and lost wages for employees injured in the workplace. However, workers’ compensation coverage is more comprehensive than most people realize and covers the following: 

• 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:

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. 

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 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. Examining these variables in more detail will help you understand where your premium is coming from and why your rate might be higher than that of another business in the same industry. 

1. Class code rate (industry work classification)

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 an office. Additionally, a roof installer is at greater 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. 

2. Payroll

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.

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 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.

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 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.

5. Insurance carrier factors

The insurance carrier’s schedule of rates also affects your workers’ comp rate. 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 because 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, the insurance carrier ultimately 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 proprietary data — to determine rates. This is why rates differ from carrier to carrier, with some being more competitive than others.

How workers’ comp rates vary by state

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.

Most expensive states for workers’ compensation 

Least expensive states for workers’ compensation

How to keep your workers’ comp costs down

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:

• 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. Occupational Safety and Health Administration compliance is key.
• Classify workers: Ensure all 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. 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 business insurance broker or 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 specific 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.

Workers’ compensation insurance is necessary

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.