Understanding how your premium is calculated can help you lower the cost of your coverage. For workers’ compensation, there are three main components that create the premium: payroll, class codes and experience modification.
- Insurance companies need an estimated annual payroll when setting up a new policy.
- The initial estimate is used to calculate your premium. It is critical that the payroll predicted is as accurate as possible. If the payroll is underestimated, you will pay the insurance company for the unpaid premium after the end of the policy. If the payroll is overestimated, the insurance company will refund you for the overpaid premium.
- Class Codes
- The class codes identify specific job categories.
- A code is assigned for each type of job or employee operation. For example, insurance companies recognize field workers for a home health care agency as 8827.
- The class code is then assigned a base rate. This rate is the cost for workers’ compensation insurance per $100 of payroll.
- Different class codes have different rates depending on how risky each type of work is.
- Experience Modification Rate (EMR)
- The EMR is the number used by insurance companies to gauge both the past cost of injuries and future chances of risk.
- The lower the EMR of your business, the lower your workers’ compensation insurance premiums will be.
To determine your premium, multiply the payroll for each individual’s class code by the base rates assigned to that class code. Divide that number by 100, since each rate is $100 in payroll. Then, multiply the entire equation by the experience modification.
Here is an example:
Payroll for 8827 class code: $100,000
Base rate for 8827 class code: 2.00
[(100,000 x 2.00)/100] x 1.30: $2,600
Seeing an increase in the cost of your workers’ compensation insurance premium may sometimes seem like just another increase by an insurance company. In reality, there’s a specific method used to calculate your premium, and there are actions you can take that may reduce your costs compared to similar industries. Of course, other factors may affect your rate as well.
To learn more, contact ProAction at 951-898-9892 or email us at email@example.com.