Calculating Workers’ Compensation Premiums

Standards for workers’ compensation insurance policies are set by the National Council on Compensation Insurance (NCCI).   The NCCI uses more than 700 codes for specific job descriptions to help determine insurance premiums. These codes are applied to information submitted about your business by your insurance agent. Regulations vary from state-to-state, so setting standards is anything but a simple process.

Understandably, the complex nature of the process causes many employers confusion and concern about their workers’ compensation policies.  Therefore, understanding the basics of workers’ compensation plans and how your premiums are determined is important.

Workers’ Compensation Premium Calculation

Your insurer will estimate your first year’s premium based on a projection of your company’s payroll and the type of business you operate.  At the close of the first year, the insurance company will do an audit to determine a more accurate premium, based on a year of payroll information and your business classification.

It is important to make any necessary adjustments during the end-of-year audit, since it is often difficult for a new business to predict what its first-year payroll will be.  Working closely with your insurance agent will ensure your premium accurately reflects your needs.

Due to the complexity of the process, there are a handful of private companies that work to ensure accurate premium calculations. Independent premium auditors specialize in finding overcharges in workers’ compensations premiums. Such overcharges can occur when payroll is reported to the insurance company incorrectly, showing too many workers in risky jobs, or when a business is misclassified as a higher risk workplace than it actually is.

Even though states mandate workers’ compensation, they don’t actually set the premiums. Instead, they approve the rates that prescribe a certain dollar amount in workers’ compensation premiums for every $100 of payroll. Some states permit discretionary credits, which allow insurance companies to discount premiums, offering tremendous assistance to insurers in a competitive workers’ compensation marketplace.

Although accurate payroll records are essential in determining premiums, payroll is not the only component of remuneration. The NCCI also considers employee commissions, bonuses, overtime, holiday, vacation, sick pay, incentive plans, profit-sharing plans, payments for tool reimbursements, the value of rental housing and lodging provided by an employer, and the value of store certificates or merchandise given to employees.

After the first year, your premium is based on the injury rate at your workplace; so it is likely you will see a change based on your company’s experience with workers’ compensation claims. It becomes obvious that good record keeping, paired with effective communication with your insurance representative, is the key to ensuring your workers’ compensation premiums are in line with your needs.

Help Yourself:

• Discuss all aspects of your business thoroughly with your agent. The more honest you are, the more realistic your premium will be. If your payroll or business description changes mid-year, you can always change your workers’ compensation policy to reflect these changes.
• Some states exclude officers, owners, partnership, and sole proprietors from required workers’ compensation coverage.  If you wish to cover any of these individuals with your policy, you might have to request such coverage specifically and pay for it additionally.

Let us help you make an informed decision about your workers compensation insurance needs.  Our licensed agents specialize in helping small businesses obtain the best coverage at the best price, give us a call today at 855-780-1783.