Workers compensation insurance, workers comp, or workman’s comp is one of the most common considerations for business owners and operators. But how much does workers comp insurance actually cost?
If your business employs someone other than just yourself, you are required by law in most states to have workers compensation insurance coverage. That said, this doesn’t mean that all workers comp policies and premiums are created equal – each is defined by a combination of state laws and how insurers design their policies, and it certainly doesn’t mean every business will pay the same rate in each state. There are many factors that contribute to workers compensation costs for your business’s specific workers comp costs.
In this article, we’ll break down the basics of workers compensation insurance and dive into the different factors that affect the premiums.
What is workers compensation insurance?
Workers compensation insurance is an essential business policy that provides financial support to employers if an employee experiences a work-related injury or illness. This can cover medical expenses, lost wages, rehabilitation, and, in severe cases, death benefits.
For example, if you own a warehouse business and an employee is injured while working a forklift, your business will be required to cover their medical bills and lost wages — among other injury-related expenses. Workers compensation insurance allows you to transfer that financial responsibility to an insurance company.
The requirements for workers compensation insurance vary by state. Some states, for instance, manage their workers comp through public funds and prohibit private insurance companies from providing this coverage at all – those are “monopolistic” states. North Dakota, Ohio, Washington and Wyoming are such states, and all workers compensation insurance is purchased through the states directly – insurance brokers are not permitted to sell workers comp policies in those states but can offer other coverages.
Workers compensation policies and premiums will also differ substantially from business to business, as policy terms and price will depend on: the company’s industry, it’s employees’ job duties, how long the company has been in business, any information about previous incidents, prior claims, and other factors.
How much does workers compensation insurance cost on average?
Great question! The answer is – it depends. It depends on what state(s) your business has employees, what work those employees do and if you need any “special” coverage. Generally speaking, policies for businesses with a few employees doing clerical work or coding start at a few hundred dollars a year.
Keep in mind that there are many factors that affect the overall cost of a workers compensation policy, such as your business industry, number of employees, and claims history. Higher-risk industries (e.g. construction vs. office workers) and companies with more employees tend to pay higher workers comp insurance premiums than small, low-risk businesses such as small law offices or business consultants.
Workers comp policies’ premiums also aren’t “fixed”, rather they are auditable. That means that a business estimates its payroll by classification and state at the start of the term (called “exposure”) and then when the policy expires, the insurer will audit for what those actual exposure amounts were. That adjusts the premium to its final amount. If a business over-estimates, it could see a return premium at audit, and likewise if it was a small company and grows during the term, it will pay more premium at audit.
Unfortunately, determining the cost of workers compensation insurance is not a simple process, and businesses can pay wildly different rates for coverage, even if they’re in the same industry. Let’s take a look at some of the main factors that affect workers compensation rates.
Workers compensation class codes
In the world of workers comp insurance, each job title has a corresponding four-digit number, known as a classification code or “class code”.
Class codes have an accompanying description that provides context about the job and a corresponding rate in the state. This rate is the amount per $100 of payroll that is charged in workers compensation insurance premiums per employee.
For example:
Let’s take an example in California. The class code “88108832” represents a clerical office employee in California chiropractor and has a class code rate of about $0.5014 depending on the insurer. Compare that to a On the other hand, a pottery manufacturercrane operator has a class code of “40499534” and typicallyhas a rates over of $5.004.26. That’s a 10x difference in premium driven by class codes alone, not even yet accounting for claims, company history, safety programs, etc.
These codes are classified and maintained by the National Council for Compensation Insurance (NCCI) or a state-sponsored classification system. The NCCI is the insurance industry’s primary source for analyzing the risk profiles of various forms of employment in order to effectively underwrite workers compensation insurance, and some states align to it but can have their own classes, subclasses or other deviations. So, it’s important to discuss your exposures with a knowledgeable licensed broker to properly classify your risks and therefore get to the proper premiums for budgeting.
Claims history
Your company’s past claims play a significant role in determining the workers compensation insurance premiums you’ll pay. Insurance providers assess the frequency and severity of past claims when calculating premium.
Claims your company has experienced in the past, could drive premiums higher. This is because insurers view businesses with a history of frequent or expensive (called “severe”) claims as a higher risk. On the other hand, a clean claims record is generally a gold star when it comes to purchasing insurance and indicates less risk of future claims.
But how do insurance underwriters analyze your company’s risk, and how much does it affect your premiums?
Experience modification rate explained:
The Experience Modification Rate (EMR), also known as X-Mod or E-Mod, is what the insurance industry uses to compare your company’s workers compensation claims history against industry averages to predict the risk of future claims. Most states report and utilize the NCCI for experience rating, however several states (California, monopolistic and others) will have their own modification calculations.
Companies typically earn their EMR after a few years of insurance experience. Until then, they start out with a 1.0 or a “unity” modifier. After enough experience data is gathered (typically after the 3rd year of coverage, but can be earlier), the modifier is calculated. An EMR above 1.0 will increase workers compensation costs, and an EMR below 1.0 will decrease costs. An EMR above 1.0 will increase workers compensation costs (also called a “debit mod”), and an EMR below 1.0 will decrease costs (a “credit mod”). The calculation is based on your company’s claims experience balanced against the payroll and premium amounts and then compared to your peer group in those classes within the applicable states. The math isn’t simple, but in general, if your business has no claims, the mod is unlikely to be above 1.0.
Both severity and frequency of claims can contribute to an increase or decrease in EMR. Let’s say your employee, an office manager, fell in the office, requiring back surgery and five months of lost wages. Although this business does not frequently have workers’ compensation claims of this nature, the severity of this one claim would likely increase the EMR.
Payroll and number of employees
We’ve talked about how payroll is another major player in determining your workers compensation insurance costs. For each specific class code, you’ll pay a certain amount on every $100 of payroll. So this means that if you hire highly-paid employees with a relatively low class code rate, you may still pay a substantial amount in workers compensation insurance.
But what counts as payroll for the purposes of calculating your workers comp premium? Insurers will typically underwrite policies at premiums based on projected payroll. Once the fiscal year is over, the insurer will reassess the incurred payroll expenses and either credit your account (refund premiums) or debit your account (charge you more in premiums) – remember, that’s the audit we mentioned earlier.
Wages, overtime, bonuses, commissions, incentive plans, holiday, and sick leave payments, will all canbe included in this payroll projection – payroll is defined under state laws and applicable workers comp rules. However, tips, group insurance and pension plans, severance pay (except for accrued vacation), and expense reimbursements are typically not taken into account when calculating your workers comp payroll exposure.
Workers compensation by state
Each state has different regulations and requirements when it comes to workers compensation. That said, 49 states and the District of Columbia require companies to have workers compensation insurance, Texas being the only odd one out. Texas allows for non-subscription to workers compensation, but (and this is a big one) employers are then required to purchase other insurance policies and prove their financial ability to pay for potential claims in other ways – so, we just recommend adding Texas to your policy if you have exposure there and keeping it simple.
When it comes to limits, endorsements, and exclusions, each state varies. Check out our breakdown of state-by-state workers compensation requirements for more details on this.
As we noted earlier, there are three types of states regarding workers compensation: NCCI states, independent bureau states, and monopolistic states. NCCI states use the codes and rates provided by the National Counsel on Compensation Insurance.
Independent bureau states like California, Minnesota, and Wisconsin have established their own separate rating bureau. For example, the WCIRB, or Workers Compensation Insurance Rating Bureau, is the largest single-state market and the sole experience rating authority for workers comp in California.
Once again, monopolistic states like Ohio, North Dakota,
Washington and Wyoming are those that have established a state fund for underwriting workers compensation insurance and prohibit private insurance coverage – if you’re solely located in one or any of those states, you must procure your insurance from those states directly.
Workers compensation calculator
So, how do you calculate your estimated workers compensation insurance costs? As previously mentioned, the formula for workers compensation insurance includes the class code rate, EMR, and the business payroll as follows:
State Taxes/Fees/Assessments
While this formula is a great way to get an estimate of your premium, it will still only give you a ballpark figure. The state in which your business operates, your precise EMR, and the diversity of your workforce’s class code rates will all come into play when calculating a precise rate.
How much will an employee receive in workers comp benefits?
When considering how much workers compensation benefits an employee will receive, it is governed by
the state in which the employee resides and specific tables associated with injuries and illnesses.
Most often, benefits are calculated and paid based on the average weekly wage. This is calculated by multiplying the employee’s daily wage by the number of days worked in a full year. That number is then divided by 52 weeks to get the average weekly wage and is subject to maximums.
What you should understand about benefits and claims is that the best way to control these costs is to reduce the risks of injury or illness overall. A good safety program, well trained employees and overall positive corporate culture can help prevent claims from happening in the first place. When it comes to the benefits an injured employee receives, claims adjusters are well trained to guide the employees and the employer through the process. Know that timely reporting is critical – claims costs increase exponentially if claims are not reported within the first day or so of the event – and complying with reporting and information timeframes that adjusters offer is necessary for being in compliance with policy terms.
How to better manage workers compensation insurance costs
Most factors that affect your business’s workers comp premiums are in your control. Again, the best way to lower your workers compensation premiums is to focus on employee safety. After all, the less risk your employees are at getting injured or sick in the workplace, the fewer claims you’ll have.
Employee safety training
Safety training is an afterthought for many companies, with many seeing the high cost of programs as an unnecessary expense. However, failing to invest in a solid training program costs businesses more in the long run. A recent study by the Office of Energy found that employers can save between $4 and $6 for every $1 spent on safety training.
Investing in a workplace safety training program for your business can reduce the risk of costly accidents and employee injury. In turn, this will keep your claims record clean and lower your EMR.
Maintain a safe work environment
Beyond training employees, you should also ensure that everything about your workplace, from the building itself to the equipment, procedures, and conditions, is safe. Check equipment frequently to ensure it is working properly, inspect the workspace for tidiness, give your employees breaks, and remind them to use personal protective equipment (PPE) at all times. You should also have clear guidelines for handling hazardous materials or heavy machinery. If your insurer provides recommendations in the form of a loss control report or other correspondence, those are not-so-subtle nudges as to what they expect in terms of safety and risk management. Failing to respond or implement recommendations could also result in higher costs or the insurer refusing to offer you a renewal policy.
Opt for a pay-as-you-go workers comp policy
One way to reduce your premiums is to opt for a pay-as-you-go policy rather than a traditional workers compensation policy. The main difference is that with a pay-as-you-go policy, you pay based on your actual payroll expenses for a specific period, while in a traditional policy, your payroll is estimated. This generally results in high premiums, especially if your payroll amount changes throughout the year.
Additionally, traditional workers comp policies typically require a hefty 25% down payment, which is not necessary with a pay-as-you-go plan.
Get employees back to work as soon as they are ready
The longer an employee is receiving workers comp benefits, the more of an effect it will have on your EMR. Implementing a return-to-work policy can help in setting expectations both for employees and managers. Sharing that policy with the adjuster/insurer allows all parties to be on the same page. Each claim is different, and the circumstances of each employee’s return are unique. However, the common goal is to return the employee to work safely and handle the claim to closure.
Choose the right deductible
Most small business won’t have a deductible for their policy as those are typically more of a risk financing tool to lower the overall total cost of risk to a company. However, some insurers and some states allow you to choose a small deductible if applicable. Your deductible is the amount of money your company will cover for workers compensation payments before insurance kicks in. The higher you set your deductible, the lower your premium, and vice versa. Balance the financial liability you are willing to take on with the amount you’d ideally like to pay for monthly premiums and choose your deductible accordingly.
Get help from an insurance broker
It is no secret that navigating the business insurance world is a headache-inducing task. When it comes to workers compensation insurance, there are a lot of caveats and fine print that can affect your costs. Choosing an insurance broker to guide you through this process not only makes things easier but can also save you money in the long run.
Finding workers compensation insurance for your business
If you’re considering the best option for workers compensation insurance, simply create an account with Embroker to determine the best possible premium for your business.
Our proprietary software can help calculate your risk profile compared to the industry average. Whether you’re a startup or an established business looking for the best rates, Embroker can help find the best workers compensation insurance quote for your business.
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