PAYDAY Workforce Solutions Blog

How Workers' Comp Insurance is Calculated

On Nov 4, 2012

Workers' comp insurance is based on the total amount of wages on an employers' payroll, the job environments in which employees work, and claims history. A smaller payroll size and less hazardous job environments will result in lower premiums, and more hazardous jobs will result in higher premiums. Choosing PAYDAY for your pay-as-you-go workers' comp insurance can help keep your workers' comp costs low, because your premiums will be based on actual employee wages, not estimates.

In calculating your pay-as-you-go workers' comp insurance, the three main factors are still considered:

  • Employer's payroll size
  • Job classification of each employee
  • Past workers' comp claim experience

Determining the risk factor of each employee -- the odds that one of your employees will get injured while working -- is a difficult task. It falls to The National Council on Compensation Insurance (NCCI), a neutral body that assigns job classifications to workers' compensation insurance companies. The safer the workplace is, the less a business may have to spend on workers' comp insurance, which is why many organizations employ a Safety Officer.

In addition to the work environment a company's actual claims history will greatly affect the cost of workers' comp insurance. Claims history is expressed as a modifier, with 1.0 representing a company that has an average claims history compared to its peers. An experience modification higher than 1.0 means that a company's claims history is higher than average, and that will result in higher workers' comp premiums. With an effective safety program in place an organization can lower their workers' comp modifier to less than 1.0. That would result in a business paying lower workers' comp premiums.

The formula below shows how your workers' comp insurance will be calculated:

Payroll (per $100) X Classification Rate X Experience Modifier = Premium

Let's look at an example. Let's say an administrative assistant is earning $673 per week and her classification rate (risk factor) is 0.85 as an example. With an average experience modifier (1.0) the calculation would be:

$6.73 X 0.85 X 1.0 = $5.72

Similarly, if the claims history of the business was less than average, and had an experience modifier of 0.5, that would result in a lower premium of just $2.86.

Each year, the insurance company will adjust the workers' comp modifier based on the past three years. Organizations with high safety records will have lower premiums. Therefore, try to manage your safety program so that your past three years have the fewest claims as possible. This can be done through the implementation of a safety program.

For many companies, pay-as-you-go workers' comp is a better choice than traditional workers' comp insurance program. That's because a pay-as-you-go program offers two important benefits.

First, pay-as-you-go is easier to manage because deductions are automatically tied into your existing payroll. There's no extra paperwork to fill out or insurance companies to deal with. Second, you do not have to put up a large cash deposit to cover any possible claims. This allows you to free up much-needed capital to help you run your business.

To find out if pay-as-you-go workers' comp insurance is right for you, contact a payroll specialist. We will provide you with complete program details and a cost analysis, based on your actual payroll size and classification rates.

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