Some small business owners may have a difficult time understanding how workers’ compensation premiums are calculated. This should come as no surprise, however, as the process is complex and workers’ compensation premiums vary for many reasons.
Workers’ compensation can be a nightmare for small business owners if proper steps are not taken to understand and review the policy. A general understanding of how workers’ compensation premiums are calculated can help a small business owner prevent large audit bills or at least mitigate audit bills.
The workers’ compensation premium calculation is made up of many individual rating elements that come together in a rating formula ultimately used to develop the premium an employer pays for their individual workers’ compensation policy.
Before calculating your premium, the insurance company classifies the business based on the risk of injury within the industry. The company then uses this classification code to estimate your premium. More potentially hazardous industries, such as construction, will end up with higher rates than those that have lesser risk, such as retail. Your employees will be classified based on this categorization.
To rate or calculate a simple policy may only require:
- Identification of the correct classification code –
- Rate associated with the correct code –
- Assigned payroll associated with the class code –
Workers’ comp insurance premiums are calculated according to how employees are classified (with regards to the specific type of work they perform) and the rate assigned to each employee classification. The premium rate itself is expressed as dollars and cents per $100 dollars of payroll for each class code. The insurance company sets your initial workers’ compensation premiums by applying the class code rate to your expected payroll (per $100) for the upcoming year.
When an agent or broker or agency customer service representative (CSR) needs to rate a workers’ compensation policy for a client, they will go on-line to their insurance company of choice and access that carrier’s proprietary workers’ compensation rating system. Enter some basic gathered information and generate a projected annual premium for the employer.
Keeping detailed records of how much payroll is applied to each job class within a business is a good place to start in your business.