How Insurance Companies Calculate Your Workers Comp Premiums
Workers comp insurance is mandatory for employers as it protects them from injury claim lawsuits while also insuring the employees against work-related injuries and illnesses.
Companies that offer workers comp insurance calculate the premiums depending on several factors. Therefore, as an employer, understanding how these premiums are calculated is crucial.
Workers comp premiums are calculated using the formula; Employee classification rate X Employer payroll (per $100) X Experience Mod rate. An insurance company looks at these factors to calculate premiums, and this article explains how.
Classification Codes
There is a 4-digit classification code for every type of work and occupation, which is determined by the National Council on Compensation Insurance (NCCI). The system was implemented to help identify the risks associated with different kinds of work. An insurance company uses these codes to determine the type of business and estimate the workers’ compensation premium rates.
The riskier types of work attract higher rates, while those with lower risks attract lower premium rates. For example, it costs less to insure a salesperson than a construction foreman because the latter has a higher risk of being physically injured.
Experience Modification Factor
The experience modification factor (EMF), also known as mods, represents a company’s history of workers’ compensation claims. This is a number that is used to compare your company with others in the same industry and have the same employee classifications. Factors like company age, severity, and frequency of claims determine the Mod of a company.
When a company is new, it has an EMF of 1.0, and the number goes up after a couple of claims are filed or drops when no claims are made after several years. The Mod for companies with few and less severe injury claims is often lower than 1.0. A company or business with a high EMF will likely pay more because employees will likely file claims. Low-score companies may pay lower premiums if their good safety record is maintained.
Employer Payroll
Premiums for workers’ compensation are tied to an employer’s payroll. An insurance company uses the workers’ comp calculator formula and your existing or projected payroll in a year. You pay a certain premium for every $100 payroll based on your employees’ weekly wage. Companies with bigger payroll sizes are charged higher premiums than those with smaller payrolls. This is because an employer with many employees will likely have more claim costs, making them a bigger risk for an insurance company.
Location of the Company or Business
The premiums of workers’ comp insurance can be affected by the location of the business or company. Insurance companies factor in local labor laws and the average cost of living to determine the risk associated with a particular area. Businesses in high-risk areas may have higher premiums than those with lower risks.
Summary
Understanding how an insurance company calculates workers’ comp insurance is vital for any employer as it helps employers find policies within their budgets. As an employer, you should ensure that the work environment in your business or company is safe for employees. In addition, ensure that you review your classification codes regularly to ensure they are appropriate and accurate for the current day-to-day running of your company.
