How to Calculate Workers’ Comp Insurance Rates
Basics of calculating workers’ comp insurance rates:
Every state (except Texas) requires employers to have a current workers’ compensation insurance policy, though requirements do vary greatly by state. For example, large companies may be allowed to self-insure themselves against liability for employee injury. Most employers do need to work with a workers’ compensation carrier.
The following is meant to be a guide for understanding how to calculate workers’ comp insurance rates. Note that there are variances by state. The methods most popularly used here are used as a guide. For specifics in your state, it is best to work with an independent auditing company who knows the ins and outs of these calculations and can help you ensure you are getting the best deals on your premiums.
You start out with the basic rate per hundred dollars of compensation (payroll). Then you apply the different workers’ compensation classifications to each employee based on their risk level. For example, a clerical worker has less risk exposure than a factory worker. Each classification has its own rate per hundred dollars of payroll.
The NCCI classification system is used to determine the workers’ compensation classification for each worker, unless your state does not subscribe to the system.
The key is that the business industry is classified, not the employee’s specific workplace. For instance, in a nursing home, the housekeeping staff aren’t classified as janitorial, but rather health care. This classification is called the governing classification. However, some workers are always classified the same regardless of industry (e.g., clerical). These are called “standard exceptions.” There are other exceptions, but we’ll just stick to the basics.
Once you have calculated the rate per employee’s workers’ compensation classification, multiply it by payroll (per hundred dollars). This is your manual premium, which may later be adjusted by other factors. The experience modification factor of the employer can make the premium higher or lower. This rate is based on prior workers’ compensation claims and losses.
The rate may be adjusted based on other various factors. For example, the rate could be discounted based on the size of the company or increased if the policy is not in an assigned risk plan.
Many workers’ compensation plans are affected by your company’s past losses (actual paid claims plus reserves as determined by the workers’ compensation carrier).
A private auditing company can help you watch the insurer’s claims handling and reserving as well as accurately calculate workers’ comp insurance rates to find mistakes in your favor. Poor claims handling and mis-calculations of your workers’ comp rates can significantly inflate your premiums adding unnecessary costs.
Insurance companies are notorious for making mistakes in their favor when it comes to calculating workers’ comp insurance rates.