Workers Compensation Insurance Premium
Regardless of whether your business has a staff in the hundreds with revenue in the tens of millions of dollars, or your business has three employees; one of the most basic costs of doing business is insuring your employees against injury on the job. In 48 out of 50 states it is required by law to purchase workers compensation insurance. Even if your business is not legally required to carry coverage, it is important for you to protect your business from all types of liability. This makes your workers compensation insurance premium one of the most precious fixed costs any business owner can make. Here is an in-depth analysis of how a businesses workers comp premium is calculated.
How Workers Compensation Insurance Premiums are calculated:
Workers compensation insurance premium is calculated according to how employees are classified in regards to the specific type of work they perform on a daily basis. It also considers the rate assigned to each employee classification. The rate of premium a businesses pays is expressed as dollars and cents per $100 of payroll for each individual class code. One employee may be classified several different ways depending upon the work they are doing on any given day. Partnering with an independent insurance agent is the best way to determine how to classify your employees based upon the work they do from day to day.
National Council on Compensation Insurance ( NCCI)
Most states partner with NCCI to determine classification codes, the rates for individual workers compensation class codes, and the experience modification factor (commonly referred to as the MOD). Some states have a portion of the state Department of Insurance do this task. Most states that do this without the help of NCCI are states like California that have an enormous economy, or states that have unique aspects to the industries within their economy.
Factors in Setting Workers Compensation Insurance Premium:
- Size of the employer’s payroll
- Employee job classifications
- Company’s claims experience
Premiums for work comp insurance are calculated by this formula
Payroll (per $100) X Classification Rate X Experience Modifier = Premium
Employer Payroll
The most controllable factor in an employer’s workers’ compensation insurance premium is the payroll of your business. For each $100 dollars in payroll, there is a specific rate determined by either the state bureau or by NCCI. The rate is determined by the ncci class codes used by the business to classify their employees. Clerical employees will have a lower rate than employees that engage in physical activities at height. If you have employees who wear a lot of hats within your organization, it is important to keep detailed records of what duties they are doing from day to day. You may be able to separate their classification codes and save on premium if the employee spends more time in a less risky class code.
Subcontracted Work
An additional factor that comes in to play for workers compensation premium is the businesses use of subcontractors. Many business owners think when they use 1099 subcontracted labor that these workers are not considered employees. Depending upon the state and industry you operate in, these workers may be considered employees. Additionally, if these contractors do not carry their own insurance policies, your business may be liable for injuries to them while on the job site. If your business does use subcontracted labor, it is important to acquire certificates of insurance from these contractors proving they have up to date insurance.
Employee Job Classification
Businesses are separated into groups according to the type of work they do. The classification system identifies which type of work presents more risk to the employees performing these tasks. Some employees within the same business may have different classification codes. A staff that works in an office will have a lower impact on the workers compensation insurance premium than an employee engaging in physical labor out in the elements.
Experience Modification Factor
Your experience modifier – typically referred to as your Ex Mod – is a numeric representation of your company’s claim experience. Ex Mods are based on how your business compares to others in your industry with similarly classified employees. An average Ex Mod starts at 1.00. Employers with fewer and less severe accidents than average have a MOD of less than 1.00. This will generally take a few years of consecutive coverage to be effected one way or the other.