Lowering Your Workers Compensation Premium

Lowering Premiums by Understanding how Premiums are Calculated

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Workers compensation insurance is mandatory in most states. If your business employs workers and you are not a qualified self-insured, you are likely obligated by law to purchase a workers compensation policy.  While workers compensation coverage is a necessary expense, there are steps you can take to lower your premium. For your efforts to be successful, you must understand how your premium is calculated.

Premium Calculation

Workers compensation premiums are calculated based on the following formula:

RATE X  (PAYROLL / 100) X Experience Modifier = PREMIUM

There are two critical variables in this equation: the rate and the experience modifier.

Understanding Your Rate

The rating of workers compensation insurance is based on a classification system. Employers in the same industry that perform similar functions are assigned the same classification. Classifications are assigned by a rating bureau. Depending on your state, the bureau may be the National Council on Compensation Insurance (NCCI) or a state rating agency. Each classification is assigned a rate. Workers compensation rates reflect occupational risk, the likelihood that workers will be injured on the job. Some occupations are riskier than others. Roofing work is riskier than office work. Thus, the rate for roofing work is considerably higher than the rate for clerical work.

Premium Based on $100 of Payroll

A major element in workers compensation rating is your payroll. Your payroll is divided by 100, and the result is multiplied by the rate.  For example, suppose your payroll is $500,000 and your rate is $.15. Your payroll ($500,000) divided by 100 is $5,000. The rate ($.15) multiplied by $5,000 is $750.

Understanding Your Modifier

The experience modifier is also a critical part of the calculation. It is a numeric representation of your company's loss history compared to the average for your industry. If your loss history is average, your modifier should be 1.00. A loss history that is better than average will result in modifier that is less than 1.00. Likewise, your modifier will be greater than 1.00 if your loss history is worse than average.  Depending on your state, your modifier may be calculated by the NCCI or your state rating bureau. 

In the rating formula outlined above, you can see that your modifier is a multiplier of the premium. A modifier that is less than 1.00 will reduce your premium, while a modifier greater than 1.00 will increase it. Suppose your modifier is .90, your payroll is $500,000, and your rate is $.15. Your final premium is $675.

$.15 X ($500,000 / 100) X .90 = $675

Now suppose your modifier is 1.1. Again, your payroll is $500,000, and your rate is $.15. This time your final premium is $825.

$.15 X ($500,000 / 100) X 1.1 = $825

Lower Your Modifier to Lower Your Premium

Your business has little control over the loss experience of your industry or the rates assigned to your classifications.

Nevertheless, you can work to reduce your premiums by taking steps to lower your modifier.

  • Make Safety a First Priority By maintaining a safe workplace, both on and off your premises, you can help reduce worker injuries. If possible, budget for an outside safety evaluation and implement the changes suggested. Mandate employee safety training. Because your modifier is a multiple in the premium calculation equation, a small reduction may result in significant savings.
  • Establish a Return to Work Program A return-to-work program can help retain valuable workers while reducing the cost of workers compensation claims. The program is designed to return injured workers to the workplace as soon as they are medically able.
  • Enroll in State Sponsored Programs Some states sponsor programs to improve safety in return for a reduction in your workers compensation premium. For instance, a few states provide a premium reduction to employers that participate in a Drug-Free Workplace Program. Ask your workers compensation insurer about programs that are available in your state.
  • Become Part of a Group for Group Rating Some states offer large discounts to recognized groups. This is called group rating. To qualify for a group, your business must have a better than average safety history. New businesses may not qualify. Start now to implement a safety-first mentality with the goal of becoming group-rated.

Review Your Classifications

Many businesses are improperly classified on their workers compensation policies. Classification errors can be costly. For example, suppose your executive assistant is classified as a carpenter since she is employed by your construction company. The workers compensation rate for a carpenter will be much higher than the rate for a clerical worker. If you think your firm has been assigned the wrong classifications, ask your insurance agent or broker to review them. You can also request a classification inspection from the NCCI or your state rating bureau.  

Review Payroll Figures

Workers compensation premiums are based on projections of your payroll for the current policy period. If the projections are too high, your premium will be higher than it should be. Your premium will be adjusted when your policy is audited, but the audit may not take place until months after your policy has expired. You don't need to wait. Ask your insurer to adjust your payrolls now.

Article edited by Marianne Bonner