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How to Calculate Workers' Comp Premiums

Workplace injuries and illnesses are costly. If you own a small business and have two or more employees, by law your business may have to carry Workers’ Compensation Insurance. Just consider the following numbers on worker-related accidents:

  • $1 billion per week.  The estimated amount an employer pays per week for Workers' Compensation direct costs. Direct costs include Workers’ Comp, medical and legal costs. Indirect costs include lost productivity, training staff, investigations, and corrective measures.
  • Average cost per claim is $39, 424. According to the National Safety Council injury 2016 study, the average combined costs per Workers’ Comp claim.
  • 8 days. According to the Department of Labor & Statistics, the average number of days a worker is out of work as the result of a workplace injury or illness. 
  • $1,000 per employee. The injury impact is the value of goods or services each worker must produce to offset the cost of work injuries. It does not represent the average cost of a work-related injury.
  • $164.6 billion. The 2017 National Safety Council Injury Facts on costs of work-related injuries and deaths in the U.S.
  • 47.2 million injuries and illness a year. The number of workplace injuries and illnesses a year. 

Small Business Guide to Workers' Comp Insurance

CRUNCHING THE NUMBERS

Safety and human resources professionals are often charged with analyzing the many factors that influence Workers' Comp Insurance costs. Job classification codes, experience Mods, risks factors, industry rating systems and other variables – determining your premium can seem complex and expensive.  Once you understand the basics of how premiums are calculated, it's easier to identify areas where costs can be reduced.  Here's how it works.

The Formula. Workers' Compensation Insurance premiums are based on your company's business and industry, the type of work performed by each employee, claims history and your company payroll. 

AdobeStock_214762679-1The formula looks something like this: 

Employee Classification Rate  X  Employer Payroll (Per $100)    X Experience Mod Rate (Mod)     =                      Your Workers’ Comp Premium

Employee Classification Rate. First, a rate is assigned to your employee class code. This is a 4-digit code for the specific type of work performed by each employee. The system helps to identify the risk associated with different types of work. In most states, the National Council on Compensation Insurance (NCCI) determines the employee classification rate, although some states have their own system. 

Here’s an example. A manufacturing company has nine employees classified as 5506 and a Workers’ Compensation rate of $12 per 100. That means for every $100 of taxable wages paid to the nine workers, the employer is charged for Workers’ Comp Insurance. The same company also has one administrative support staff with an 8810 class code, which has a rate of $0.15.  For $100 of taxable wages paid to that employee, the employer is charged $0.15 for Workers’ Comp Insurance.

Employer Payroll.  Workers’ Comp premiums are tied directly to the employer’s payroll. For each employee class code, the employer pays on every $100 of payroll.

AdobeStock_53640681Experience Mod Rate. Also factored into the premium is the Experience Mod Rate (EMR), also called Mod. This is a number based on how your business compares to other businesses in your industry with similar employee classifications.  A company’s Mod is determined based on a number of factors, including the age of the business and the severity, frequency and number of claims. An average Mod starts at 1.0. If your business experiences fewer and less severe accidents than the industry average, your Mod would be assigned a number less than 1.0.  And if you recorded higher and more severe accidents, your Mod will be higher than 1.0.  Once the classification rate and payroll are determined, the Mod is then applied to the premium. For a Mod of 1.10, the premium would be assessed a 10 percent debit and a Mod of .90, a 10 percent credit.

WAYS TO SAVE

Is reducing costs a priority for your small business?  93.7 percent of the time,   Propel HR has helped businesses save money on Workers’ Compensation Insurance.  It’s one of the many benefits of working with a Certified Professional Employer Organization (CPEO), like Propel HR. Here are just a few cost-saving benefits.

Better rates. PEOs AdobeStock_118646324represent a number of small businesses. By pooling together the employees of these businesses into one large group, a PEO can negotiate better plans with more competitive rates.

No money down. Most traditional Workers' Comp Insurance plans require as much as 15 to 25 percent down on a premium. With our plan, an upfront payment is not necessary.

More accurate pay-as-you-go premiums. Because our Workers’ Comp program is tied to your payroll, you can extend your premium over the year.

Prevent costly mistakes.  We help you prevent costly mistakes. Some of the most common include incorrectly classifying employees, not providing employees with required information, and failing to file claims correctly and on time. In addition, our certified Safety Risk Managers will help identify the potential hazards and address the liabilities that may put your business at risk. 

A Resource for Small Businesses. To learn more about Workers’ Comp Insurance, download our free e-book for small businesses. In this guide, you'll learn how to get better rates, details on coverage and effective ways to save money. 

The Small Business Guide to Workers' Compensation Insurance

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