What factors affect the total cost of workers’ comp?
Workers’ compensation is based on a classification system. All employers in the same industry with the same functions will have the same classification. These classifications are assigned workers’ comp rates based on the history of occupational risk.
The factors that affect the cost of workers’ compensation include:
The classification system, as mentioned above, depends on the industry of the business. If your industry employs laborers, your class will likely have a higher workers’ compensation rate because of its classification code. It’s important to note that this classification is very important because misclassifying an employee who gets hurt on the job is just one of the many warning signs of fraud.
The experience modification rates (EMR) is a representation of how the workers’ compensation claims experience compares to another similar business in your state. Employers start with a rate of 1. This means that they pay 100% of the rate assigned to the class code with no automatic credit or debit adjustments.
Luckily, once the small business has had coverage for a few years, they become eligible for an EMR, which means mandatory adjustments to manual rates.
There are two types of EMRs: a credit EMR, which is an experience modification factor less than 1, and a debit EMR, which is a factor greater than 1. The modification factor is applied to the premium to reduce or increase the cost of workers’ compensation coverage. These factors are based on the loss history of the business. By adjusting the premium, they adjust the rates businesses pay for their class code.
- Scheduled credits and debits
Most states allow insurers to apply credits and debits to small business workers’ comp coverage to adjust premiums up and down. These credits are scheduled and can be subjectively used at an underwriter’s discretion. An underwriter can offer pricing based on unique conditions within a small business, including years of experience, workplace safety training, and work environment.
Each class code is assigned a base rate for every $100 of payroll. For example, a workers’ compensation rate of 1.5 equals $1.50 for every hundred dollars of payroll in the class code. Most states require that a premium discount be applied to premiums that hit a specific dollar amount. The discount affects the manual rate and is based on the theory that there are fixed costs for workers’ comp policies. Premium discounts will change if the payroll is higher or lower than the actual premium.
- Loss history of the company
Class codes with greater loss frequency and severity typically cost more. However, this can be different depending on the state in which the business operates. Loss history calculations are influenced by the number of claims, cost of medical services, and the cost of replacing lost wages.
The two most common types of workers’ comp state credits are formal safety programs and drug programs, which are required by most states. These credits aim to reduce the frequency and/or severity of workers’ comp-related injuries and require an employer to submit a formal drug and/or safety policy to the state. These policies can give businesses additional premium credits to reduce their insurance premium.