Workers’ compensation insurance is a key piece of protecting your company and your employees.
So much so, that every state except for Texas – and in some cases New Jersey -requires employers to have some form of work comp coverage. It is also estimated that employers spend $1 billion per week in work comp costs.1
So, with all that weight tied to workers’ comp, you should understand how your rates are calculated. Let’s take a look at the general formula, with the understanding that some other factors may also be involved.
Start with Payroll
Your payroll is the starting point for calculating your workers’ comp premiums. For every $100 of taxable wages you pay on payroll, you will be charged an amount for work comp coverage. What amount? Let’s take the next step to find out.
Employee Class Code/Rate
For every employee, there is a four-digit class code assigned to work they perform. In Nebraska and Colorado, the rates for those codes are determined by the National Council on Compensation Insurance (NCCI). In theory, the rate should correspond to the risk the employee has based on their job’s tasks. For example, an office worker may have a rate of $0.15, while a factory worker may have a rate of $15.
Experience Modification Factor
Also known as an Experience Mod, Experience Mod Rate, or just a Mod, this factor compares your business to others in your industry to adjust your premium. Insurers consider questions like – How old is your business? How frequently have you had work comp claims? How severe are those claims? These all can have an impact on your Mod.
The average Mod is 1.0, so your business will be higher or lower depending on the circumstances. If you have a good business history with minimal and less severe claims, you will likely have a Mod lower than 1.0. For example, a 0.90 Mod would give your business a 10% rate credit. Conversely, a 1.10 Mod would add a 10% debit to your work comp premium rates.
Now that we have some moving pieces, what’s the formula? If you’d like to estimate your business’s work comp rates, plug in your numbers to this equation:
Class Code Rate (X) times Experience Mod (Y) times (Payroll/100) = Rate Estimate
This formula will give you an estimate for your company’s work comp premiums. Other factors like the Loss Cost Multiplier may also have an impact on what your rate ultimately will be.
Workers’ comp may seem like a complicated coverage, but it doesn’t have to be. Let our agents talk with you and help you understand your risks and options for coverage.
1 – 2019 data according to Propel HR