How is my Workers' Comp Insurance Premium Calculated?

Investing in worker's comp insurance can be a smart move for your business, but the idea of covering the cost of the policy can be a bit daunting.

However, if you stop for a minute and think of the various ways your employees can potentially get injured and what it would cost to cover the medical bills and leave for those injuries, the insurance premium payments no longer seem too bad.

Understanding how to calculate your workers’ compensation policy premium from the get-go can help you feel better about buying a workers’ compensation insurance policy, ensuring you’re getting the protection your business needs to thrive. 

The basic equation to calculate Premium

There is a basic equation that is used to calculate your Workers’ Comp policy premium which  is as follows:

Let’s now look at each factor in this equation.

‍Annual Employee Payroll; this number should be the annual gross projected payroll you intend on paying your employees throughout the policy term, effective date to expiration date.

If your business has various categories of employees (see example below) try to break down the projected payroll per category or kinds of various work performed by your employees. 

Continue by dividing each annual payroll figure by $100.

Now here comes the fun part, The Rate.

‍Insurance companies use a lot of factors to determine the rate (per every $100 of payroll) that you will be charged.

The main factor is the number of claims and the total value of claims that your specific industry filed in your state over time. Which is why rates can often change year after year.

Essentially, the rate reflects the level of risk employees in your industry are exposed to and the likelihood of an injury occurring.

For example, the rate for a roofer will be a lot higher (pun intended :-) than that of a  clerical worker sitting in a comfortable office chair all day long. 

Example of how do the calculations

Let's take a Landscaping business to demonstrate how this works. 

The business has 4 employees in total. 2 that work in the office and 2 that work as landscapers. 

Let’s talk about the office employees first.

Annual Employee Payroll: The 2 office employees have a combined projected payroll of $60,000. 

Rate: The rate for a clerical worker in their state is $0.15 per every $100 of payroll.

Plug the numbers into the formula Annual Employee Payroll / $100 x The Rate = Your Premium

$60,000 / $100 x $0.15 = $90

So the annual premium for these employees will be $90. 

Now let’s calculate the landscaper workers’ comp premium. 

Annual Employee Payroll: The 2 employees that work in the field have a combined projected payroll of $100,000.

Rate: The rate in their state is $5 per every $100 of payroll.

Plug the numbers into the formula Annual Employee Payroll / $100 x The Rate = Your Premium

$100,000 / $100 x $5 = $5,000

So the annual premium for these employees will be $5,000 

Next, add both totals together which equals $5,090.00+ taxes and fees. 

Keep in mind that in some states the rates can vary per carrier and in others the rate is set by the state. Carriers can also add credits or debits based on a case by case basis. 

Don’t want to calculate your premium manually? You’re in luck :) We have a really nifty form that will do all the calculations for you. Get started here.

How to find your rate

While all of the above may help you calculate your premium, there is one more item to bear in mind and become familiar with.

Every industry is described by a class code. This is typically a 4 digit code that underwriters and insurance geeks, like us at Kickstand, use to describe your type of business and your operations.

For example 8810 is clerical  and 0042 is landscaping. Each class code has a specific rate - that’s what we’ve been referring to as The Rate.

Workers’ Comp Insurance Premium FAQs

As you try to figure out your rate, you may have more questions. Here’s a handy FAQ section to address those. 

How does the location of my business affect my workers’ comp premium?  

Since workers’ comp is regulated at the state level, each state sets its own rates based on the costs of claims within that state for each industry. These rates reflect the risk and cost associated with different industries in that state.

You can check your state's specific rate by looking it up online, as each state's insurance department typically provides this information.

Additionally, it's important to note that a few states, such as North Dakota, Ohio, Washington, and Wyoming, operate their own state-run workers' comp funds. In these states, businesses are required to purchase their insurance from the state fund. 

Often, the rates in these state-operated funds can be higher compared to those in states where private insurance competition is allowed. Therefore, if your business is located in one of these states, you might encounter different, and possibly higher, premium costs.

What is an experience modification factor and how does it affect my premium?

Your experience modification factor (ex-mod) is a factor that goes into your personal workers’ comp rate, typically after your business has been in operation for four years. This factor is determined by your business's past injury costs and the likelihood of future risks.

A new business starts with an Ex-Mod of 1.0, which is the baseline. Its premium is not affected in any way based on its Ex-Mod.  

A company with a high number of workers' comp claims may see its Ex-Mod increase to 1.6, while a company with few or no claims might have a lower Ex-Mod of 0.94. 

Think of the experience modification factor as a numerical snapshot of your claims history, especially when compared to others in your industry. A higher number, indicating more claims, usually translates into a larger premium.

Here’s how your EX-Mod will get factored into your premium: (Annual Employee Payroll / $100) x The Rate x Ex-Mod = Your Premium

Even if your Ex-Mod isn't currently affecting your premium, keep it in mind as a motivation to keep claims down.

Is it possible to reduce my workers' comp insurance premium?

Yes, it's often possible to lower your workers' comp insurance premium. Here’s how you can do it:

1. Make sure employees are classified correctly: Ensuring that each employee is assigned the right class code is crucial. Different job roles have varying risk levels, which can impact your premium.
2. Check owners: Review whether including owners in the policy is necessary. Sometimes, excluding them can lead to savings, as they often don't require the same level of coverage.
3. Implement a formal safety program: Establishing a safety program can potentially qualify you for insurance discounts. 
4. Implement a drug and alcohol-free program: The insurance company may offer you a discount for committing to a drug and alcohol-free program in your workforce. This generally involves establishing a written policy and conducting random testing. 
5. Ask to have dividends applied: Some states offer dividend programs where you can get a part of your premium back if your claims are lower than average.

What happens if I underestimate my payroll when calculating premiums?

At the end of the policy term, the insurance company will conduct a payroll audit. If you underprojected your payroll, you will need to pay the difference.

Where can I get a fast Workers’ Comp Insurance Quote?  

Are you ready to partner with workers’ comp experts? At Kickstand Insurance, we can help you get an idea of what to expect when it comes to workers’ compensation insurance policy costs. 

As soon as you fill out this form, you can get an instant quote of an estimated workers’ comp premium. Within 10 minutes, we can help you get an idea of what you’ll likely pay for workers’ compensation coverage, and then get you covered, all in the same business day. It’s that simple and seamless. 

Ready to get started?