This is the second in a four part series where we cover everything an insurance broker needs to know about Workers’ Compensation.
A common question insurance brokers will run into when discussing Workers’ Compensation with their clients is how policy premiums are determined. In this article, we discuss the various factors that determine the cost your client’s policy.
How Insurance Companies Calculate Workers’ Compensation
Several different factors go into calculating the premiums for workers’ compensation policies. These are some of the factors that impact premiums:
- Number of employees
- Amount of payroll
- Job classifications
- Risk exposures
- Type of industry
- State requirements
- Claims experience
The National Council on Compensation Insurance or a rating bureau established by the state determines classification codes for each job description. The classification code corresponds to a specific rate. The insurance company then uses a formula to determine the estimated premium.
The general workers’ compensation formula is:
Code rate X the claims experience modification number ÷ every $100 of payroll = the premium.
To help clients understand the rating system, it may help to create a scenario. Let’s say that the workers’ compensation rate for a tree care business was $10 for $100 of payroll. The company had five tree trimmers working for them and each earned $50,000 per year. The company had no claims, so there was no experience modifier.
The formula would be $10.00 X ($250,000 ÷ 100) = $25,000
Business owners should also be aware that family members, contractors, subcontractors, and working directors may also be covered under a workers’ compensation policy. For that reason, their salaries may be factored into the rate.
It is essential to impress upon business owners the importance of keeping accurate payroll records, as the company will be audited at the end of the policy term.
Looking to learn more about how Workers’ Compensation experience modification rates? Read more in this article.