How is workers' comp insurance cost calculated?

Workers' compensation insurance is one of the few small business insurance coverages regulated at the state level. In most states, employers must provide workers’ compensation benefits even if they only have one full-time employee.

The workers' comp policy covers medical treatment and disability benefits resulting from your employees' workplace accidents and related illnesses. If an employee has a temporary or total disability from a workplace injury, workers’ comp helps offset their lost wages.

When insurance companies calculate your workers’ compensation insurance cost, they look at a few factors:

• The type of work done by your employees (workers' comp class codes)
• Your claims history (experience modification rating)
• Your payroll

Each factor becomes a number that they use in a formula to calculate workers' comp premium:

It may look complicated, but it's just a way for insurers to assign concrete numbers to your business's risks. Let's take a look at each one in detail.

The National Council on Compensation Insurance (NCCI) has more than 700 numerical workers' comp class codes for different job types. Each one of your employees is given a code based on their specific type of work, such as accounting or lawn care. Each code has a rate associated with it, with higher rates for more risky types of work.

Basically, the insurer looks at a table and uses the rate assigned for that code in the formula for workers' comp. That's how it ends up costing less to insure an accountant than a lawn care contractor, who is more at risk of physical injury.

Most states use the standard NCCI system, while 10 states use a modified version. Five states use their own method: California, New Jersey, New York, Delaware, and Pennsylvania. Learn more about workers’ compensation laws in your state.

Your experience modification rating represents your company's history of workers' compensation claims. It shows insurers whether they can expect your company to make a claim on a workers' compensation policy, based on your track record.

A new business without a history of claims would start with an EMR of 1.0, which is the industry average. That number could increase after several claims, or drop after several years without a claim.

For example, a company with several workers' comp claims could have a rating of 1.25, while a company with a clean history of claims could earn an EMR of 0.75. The lower number results in a lower premium when entered into the formula, which is another good reason to avoid workers' comp insurance claims.

As part of its workers’ comp calculator formula, the insurance company will use your existing payroll, or your projected payroll if you’re starting a new business. You’ll pay a certain amount of premium for every $100 in payroll, based on the average weekly wage of your employees.

These rates vary by state, so your location can also end up impacting your workers' comp premium.

Workers' compensation insurance is regulated on the state level. Some states require workers’ compensation coverage as soon as you hire your first employee. Others require this coverage even for sole proprietors, especially if you’re in a line of business that’s considered a higher risk, such as building trades.

Some states maintain their own workers’ comp fund to provide this coverage. North Dakota, Ohio, Washington, and Wyoming require businesses to buy their insurance from the state fund. Several states give you the option of buying coverage from the state fund or through a private carrier.

Workers' comp is usually more expensive if you buy it from a state fund, rather than a private insurance company. On the other hand, if you can’t obtain coverage from private insurance carriers, you should be able to obtain it through the state fund.

Insurance can be a tricky thing to navigate on your own, which is why our industry-trained insurance agents do the hard work for you. We're already familiar with your state's workers' comp laws and can provide a free consultation to help you find the insurance policy that complies with those regulations.

Complete Insureon’s easy online application today to compare insurance quotes from top U.S. providers. Once you find the right policy for your small business, you can begin coverage in less than 24 hours.