Virtually all employers in every state except Texas are required to carry workers compensation insurance — the coverage acts as an essential protection for workers and employers alike. Still, workers compensation premiums can be costly and burdensome, especially for small business owners who don’t benefit from the same economies of scale as larger companies do. Further, the methods insurers use to calculate premiums is mysterious, at best. Most employers, for example, understand that workers in higher-risk industries will be more expensive to insure. But exactly how those risks translate into dollars and cents can be difficult to discern.
Workers compensation premiums vary by state and are, to some extent, controlled by state law. Nevertheless, there are certain factors that will impact how much an individual employer pays for workers compensation. So, to help demystify the process a little bit, we’ve put together a rundown on what some of those key factors are.
Class codes are numeric values determined by state Workers Compensation Boards. Every state has hundreds of codes that designate categories and subcategories of workers in various industries. The workers compensation data collection agency in the state (in New York, this is the New York Compensation Insurance Rating Board) assigns a rating to each code based on the hazards of the occupation and statistics from past claims. Higher risk occupations, such as roofers or transportation workers, will have a higher assigned rate than low-risk occupations such as department store clerks.
A business’ estimated payroll is also a factor in what its workers compensation premiums will be. Typically, the insurer will ask the business to estimate its payroll expenses for the ensuing year and base the company’s premiums on the number the employer provides. If the firm’s actual payroll turns out to be less than the amount estimated, the employer may receive a refund. If it’s higher, it may be required to pay more.
Class codes and payroll are both part of the equation used to determine rates. For example, let’s say a roofing subcontractor employs six full-time employees. Five of the company’s employees are roofers, who will earn an estimated $75,000 in salary each; the sixth is an office worker whose estimated salary is $35,000. The assigned rate for the roofers, based on their class code, is $3.35 per $100 of payroll, which calculates to $2,512.50 per employee per year. The assigned rate for the office worker, however, is only $0.28 per $100 in payroll, which will cost the employer just $98 in workers compensation premiums for the year. (Note: These numbers are hypothetical and not taken from any state’s database.)
Payroll and class codes are fairly static numbers, but workers compensation premiums are based on a company’s safety record as well. As with most kinds of insurance, customer who demonstrate a strong safety record and few claims are usually rewarded with lower premiums. By the same token, customers whose safety record falls short of their peers are likely to pay more.
For many, but not all employers, claims experience is quantified in the form of an “experience modifier” or “e-mod.” This number is calculated by the state regulatory agency responsible for collecting data on workers compensation claims or the National Compensation Insurance Council, not the insurer.
The baseline e-mod is 1, which represents the average number of claims for companies in a given industry in a given location. Companies who make fewer claims than average will be given an e-mod of less than one, while companies whose claims exceed the industry average in their area will be assigned an e-mod greater than one. Obviously, multiplying a company’s workers compensation premiums by any number less than one will result in decreased costs. And just as obviously, the opposite is also true.
That said, not all companies will be assigned an e-mod. In most states, the firm’s average workers compensation premiums over the previous three years must exceed a certain threshold before the modifier kicks in. The threshold varies considerable by state, but is typically somewhere between $3,000 and $7,000.
Importantly, a company’s e-mod, if it has one, takes into account three years of claims history, excluding the current policy year. So if your current policy went into effect Jan. 1, 2019, your e-mod will be based on your claims history for 2016, 2017 and 2018.
In addition to a company’s size, risk profile and claims history, there are additional factors that impact workers compensation premiums However, most of these are determined by the insurer or state law, and are more or less outside the firm’s control. They include:
- Load Factor — a charge the insurer adds to every policy to cover operational costs such as taxes, assessments and claims administration.
- Special Compensation Fund — an amount determined by the state, this assessment goes to a state fund that compensates injured employees who work for a company that was uninsured. This amount may be included in a company’s overall premiums or listed separately.
- Terrorism Risk Insurance Act (TRIA) — is a 2002 federal law that created a national program of federally backed insurance in the event of a major act of terrorism. The amount an employer pays into the fund is based on state guidelines, but is usually about one to two cents per $100 in payroll.
The Carmoon Group, Ltd. is a family owned insurance broker headquartered in Hicksville, New York, with affiliates in many locations across the United States. We offer an assortment of insurance products to businesses of all sizes in most industries, and we would be happy to provide you with a complimentary insurance review. Please give us a call to schedule an appointment, or simply reach out online and we will get back to you at a convenient time.