People quickly and understandably become very confused when it comes to reviewing Workers' Compensation policies and rates from insurance carriers. At its most basic, the following formula is used to calculate Workers' Compensation premiums:
Payroll (per $100) X Class Code Rate X Experience Modifier (MOD) + State Fees/Surcharges = Premium
Let’s break down each of these elements and explain where the amounts come from.
Payroll (per $100)
The basis for Workers' Compensation premiums is a company’s payroll. For each $100 of payroll, there is a specific rate which is determined by the Class Code.
Class Code Rate
Workers' Compensation Class Codes are codes that insurance companies use to identify categories of work. Employers in the same industry that perform similar functions have the same classifications. These codes are used to estimate Workers' Compensation rates at the appropriate risk level associated with the work being performed. Companies can have multiple Class Codes within their organization, depending on job duties performed by employees at the company. Most states use the classification system created and maintained by the National Council on Compensation Insurance (NCCI). Some states use their own non-NCCI rating bureaus and can have different classifications rules. Independent Bureau states
Experience Modifier (MOD)
MODs are based on how your business compares to others in your industry with similarly classified employees and of similar size. The average MOD is set at 1.00. Employers with fewer and less severe accidents than average have a MOD of less than 1.00, and those employers with more severe and an increased number of accidents are set to higher than 1.00. An organization's experience MOD can have either a negative or positive impact on the employer's premium. The Experience Modifier is also calculated by the NCCI or independent agency.
State Fees/Surcharges
Each state will have their own additional surcharges and state assessments that may include things like anti-fraud surcharges, carrier insolvency, and administrative costs.
For additional information aimed at clarifying Workers' Compensation, please join our webinar during which we will share additional information on how to become comfortable handling claims and developing a return-to-work program.
Please join us for our complimentary webinar on Thursday, August 22nd at 11:00am PDT
Demystifying Worker’s Compensation
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