How Is Workers’ Compensation Calculated?
For the majority of small businesses, workers’ compensation insurance is simply an unavoidable cost. The exact requirements vary by state, but any company that needs coverage faces a simple scenario – carry workers’ comp insurance or face the consequences.
While workers’ compensation coverage is a must for many small businesses, figuring out how much your business will owe is complicated. The exact rates can change every year and there are a variety of factors that impact how much workers’ compensation will cost your business. Let’s break down what impacts your workers’ compensation rates (and what you can do to save on these costs).
How To Calculate Workers’ Comp Rates For Your Business
The first step toward understanding workers’ compensation rates is to identify what factors directly impact premiums. There are three main elements that insurance companies use to calculate your workers’ compensation rate:- Workers’ compensation classification codes
- Payroll
- Experience modification number
Workers’ compensation classification codes
Your business’ line of work plays a major role in determining your workers’ compensation rates. Insurance companies use class codes assigned by the National Council on Compensation Insurance (NCCI) to adjust your rates. These three- or four-digit codes represent the overall risk level for different types of work. Insurance agents and underwriters use this information to adjust your overall costs based on your line of business. As you may expect, class codes that indicate greater risk will typically yield higher workers’ compensation insurance premiums. For example, an electrician will be more expensive to cover than an office worker. While many states use NCCI codes for their workers’ compensation rate calculations, some locations can complicate these calculations. There are several states that use their own code system, meaning that your rates could vary from the NCCI’s rules and regulations if your business is located in the following states:- California
- Minnesota
- New York
- North Carolina
- Massachusetts
- Pennsylvania
- New Jersey
- Delaware
- Indiana
- Michigan
Payroll
While class codes impact your insurance rates based on risk factors, your payroll serves as the basis for your overall costs. Class code rates are assigned a dollar amount for every $100 of payroll, so your overall costs will naturally increase along with your total payroll. Of course, the rates will make a major difference in just how much you owe. Let’s imagine that you need workers’ compensation coverage for an employee making $50,000 a year. If that employee’s rate was $1.50 per $100, those costs would amount to $750 for that salary. Meanwhile, a higher rate of $15 per $100 will bump those premiums up to $7,500 for that one employee.Experience modification number
Your business’ past also plays a part in your exact rates. Insurance companies factor in your overall workers’ compensation claims history and workplace safety into their calculations. In short, safer businesses with fewer, less severe claims will end up paying less than a similar business with more past incidents or infractions. The way insurance companies take your business’ experience and loss history into account is through your experience modification number, also known as a MOD. In general, agents and underwriters will look at your last three years of claims data, such as the type, severity, and frequency of claims to assess your overall risk level. The resulting MOD is then used as a multiplier in the following way.- Class code rate x (Annual payroll/$100) x MOD = Your business’ workers’ compensation premium