How Much is Workers' Comp Insurance?

The cost of workers compensation is regulated at the state level. Rates will also vary by assigned class codes, estimated payroll, claims, agent and insurance company.

How much does workmans comp insurance cost.

Understanding the cost of coverage.

For some businesses, such as an office or retail store, workers comp insurance is one of the least expensive lines of coverage. Other businesses, such as contractors and truckers, will pay more for coverage. The cost of workers comp is based on risk and payroll. As either increases, so does the premium. Workers exposed to more demanding work are more likely to get injured. As payroll increases, so does the number of employees and the likelihood of a claim.

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The Cost of Workers Comp is Regulated by Each State

Workers comp pricing is based on several factors. The lowest and the highest rates a workers comp insurance company can charge is filed set and reviewed by each states' insurance regulators. Insurance companies must file their own rates for approval each year. These rates must be within the minimum and maximum range permitted.

To prevent insurance companies from under-cutting rates and becoming insolvent, insurance company rates are regulated by a factor known as the Loss Cost Multiplier (LCM). The LCM is a factor that measures each insurance companies' loss ratios to make sure they have enough money to fund insurance claims. After the rates are filed for approval, they are either approved or rejected. This is how the rate process begins with each workers compensation insurance company.

How is Workers' Comp Premium Calculated?

Once an insurance company has the authority to sell workers compensation insurance within a state, they determine which class codes they want to target and how aggressive they want to be on pricing each work comp policy. Insurance companies utilize the following in order to determine the estimated cost of workers comp:

Covered States

Any state where you have employees living or working will be needed to calculate the premium. States often have very different experiences with claims and the associated costs for medical or wage replacement. The average rate for a landscaper in California will be over $10 in premium per $100 dollars of payroll. In Missouri, the average rate will be closer to $6 per $100 of payroll.

Business Industry

Each business must be categorized into one or more class codes in order to calculate the cost of insurance. Insurance agents and underwriters utilize the NCCI scopes manual in order to determine which code or codes are applicable to the business. Carriers have approved rates filed for each class code with the states they operate in. These filed rates are known as base manual rates. They are the starting point for pricing coverage. Class codes can have a major impact on pricing and many businesses are misclassified.

Annual Payroll

Estimated payroll is used to calculate policy premium. Each class code is priced using a rate per every $100 in payroll. At the end of each policy, the insurance company will conduct an audit in order to finalize the premium. If actual payroll is higher than the estimated payroll, premium will be higher. Conversely, if it was lower than estimated, premium will be reduced and a credit will be issued by the carrier. Workers comp is not calculated per employee. Its calculated using gross payroll estimates for all employees in a given class code.

Here is an example using two class codes with different estimated payroll for each class code:

Carrier Rate Per $100 Estimated Payroll Divide by 100
$0.28 base manual rate $25,000  (25000 divided by 100) 250
$1.75 base manual rate $100,000  (100000 divided by 100) 1000

In order to calculate the cost of workers comp you will need to multiply each class code rate with its divided payroll amount.

Class Code Workers Comp Calculation Estimated Premium
8810 Clerical $0.28 X 250 $70.00
8835 Home Health Care $1.75 X 1000 $1,750.00

Business Characteristics

All businesses will have unique individual characteristics. The owners' experience and years in business often influence rates. Companies that have policies and procedures and those that have formal drug testing programs may qualify for lower rates. Insurance companies have the ability to apply premium credits up to 25% in most states. In a few states, such as Florida, rates are firmly set bt the Department of Insurance. Credits and debits are not available.

Claims History

All workers' compensation claims are tracked permanently for each business name and their respective FEIN or Social Security Number. NCCI handles this for most states, but a few manage it on their own. Claim history includes the description of all claim and details of all expenses associated with the claim. Every insurance company has access to this information and they use it to determine acceptability and rating.
Employers will generally qualify for an experience modifier (EMR Rating or E-Mod) after 2-3 years of active coverage. This applies as long as their premium hits the state required threshold. The threshold is typically a few thousand dollars. An experience modifier is a measure, or score of how your claims compare to the claims of other businesses in your same industry. The modification rate will apply mandated policy credits or debits which are not subject to an underwriters discretion.

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Credits and Debits Adjust the Cost of Workers Comp

Insurance companies decide what industries and class codes they want to cover. If they don't think they can be profitable in a higher risk business like roofing or trucking, they can choose not to offer a quote. If they are willing to quote they can decide how aggressive they want to be on pricing. Its the underwriters job to make that decision and the agents job to advocate for the lowest cost.

In most states, the insurance company can apply credits or debits to their pricing to reduce or increase the premium. Credits or debits are applied based on the underwriters review of the business and can often be as high as 25% credit or 25% debit. That's a 50% swing in price. Most business owners don't know that most big insurance carriers own multiple subsidiary workers' compensation companies under their portfolio. This is referred to as Writing Papers. When insurance companies file multiple sets of rates with the state regulatory authority, it gives them more flexibility to compete with other insurance providers by manipulating the writing paper to control the overall premium cost.

Class codes considered lower-risk have lower rates with multiple insurance companies willing to quote. Higher-risk class codes have higher rates and fewer insurance companies willing to offer a work comp quote. Insurance Companies decide which industries they want to target, industries they are cautious but willing to quote and industries they will not quote under any circumstance.

Premium Discounts are Applied to Bigger Policies

It seems appropriate that the bigger a business is, the more it will pay for coverage. A business with more employees will have a higher payroll. Since premiums are based on a factor of (payroll divided by 100) x (class code rate), the result will be a higher overall cost. However, once worker's comp premium hits a certain dollar threshold (usually $5,000), most states require insurance companies to begin applying additional discounts on the policy. This volume discount is given because the administrative overhead for the carrier should decrease as the number of employees increases.

Risk Affects How Much a Business Pays for Workers' Compensation

Class codes considered lower-risk will have lower rates with multiple insurance companies willing to offer quote. Higher-risk class codes will have higher rates and fewer insurance companies willing to offer a work comp quote. Insurance Companies decide which industries they want to target, industries they are cautious but willing to quote and industries they will not quote under any circumstance.

Higher-risk businesses, such as construction and tree service, experience more claims that cost more on average to close. They also represent the majority of death claims. NCCI collects and shares the statistical claims data for each state.

Loss Runs and Claims Reporting

One underwriting requirement that greatly affects pricing is any applicable workers' compensation claims history for the past 3-4 years. This history is also known as a Loss Run Report. Insurance companies are required to provide any business they have insured with this report, as requested by the insured. The Loss Run Report shows the year/s of coverage with that insurance company and the details of any claims the business suffered. When a businesses can show they have had little to no claims, a good agent will work to negotiate lower rates with underwriters. They will also increase rates or decline to quote coverage if the claims incurred are too frequent or costly.

How to Control the Cost of Workers Comp?

Implementing, enforcing and documenting good business practices have a big impact on the underwriter’s willingness to write tough classes and offer credits on a policy. Experienced agents that have good connections with their underwriters will ask questions about what precautions a business takes to reduce or eliminate the possibility of claims. Experienced agents will highlight to the underwriter the steps a business takes to prevent claims when presenting your business info for quoting. Good business practices include good hiring practices, safety training and documentation of that training, a return-to-work program, checking motor vehicle reports for employees that drive while working, physicals where applicable, offering health insurance to employees and an overall attitude towards safety in the workplace.

Make payments on-time and complete audits promptly. This can be a big factor when negotiating annual renewals. If payments are made on-time and the audit is completed timely, Insurance companies and their underwriters will value the business more. Prior cancellation notices and reinstatements throughout a policy period may be a cause of increased renewal offers.

How Relationships Affect
the Cost of Coverage?

An agents relationship with an underwriter has a big impact on pricing. Insurance companies want to maximize profits. They are looking for good insurance customers with minimal losses. If an agent's book of business is not profitable to the insurance company, and that agent continues to insure business that suffers costly claims, the insurance companies becomes less likely to quote competitively for the agent, even if it’s a target industry.

Underwriters appreciate agencies they trust, such as Workers Compensation Shop. They are willing to take more risk with these partners. Insurance companies are much more likely to trust agents with healthy, profitable books of business that include correct class codes and accurate audits. Agents will often receive better pricing and higher approval odds for a piece of business they are on-the-fence with.

Smart agencies know what their insurance companies and underwriters want to quote and how they want the business information laid out, making it easier for them to make an affirmative decision.

Underwriters have production goals to meet, but they must meet those goals while maintaining a positive loss ratio. If an agent's book of business is not profitable for the insurance company, underwriters become less likely to offer the most competitive quotes. This occurs because if the agent continues to insure businesses that have costly claims, both the agent and the carrier will become unprofitable. This may occur even if the business is in a target industry for the carrier. Underwriters don't make exceptions or offer credits to poorly performing agencies. Some underwriters may try to reverse the loss ratio for that book of business. They do that by declining tougher risks, increasing rates and eliminating credits and discounts for new business quotes.

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Workers' Compensation Pricing Terminology

Policy Credit

A policy credit is a subjective adjustment made by underwriters to reduce or increase how much a workers comp policy with cost. Credits need to be requested by the agent and justified by the underwriter.

Premium Discount

A volume discount applied to premium above 5,000 to account for reduced administrative overhead for the insurance company as premium grows larger. The discount is graduated based on the estimated and actual premium paid.

Base Manual Rate

A base manual rate, or manual rate is the rate filed with the state insurance regulators by each insurance company. It is the starting rate before any credits or debits are applied to a policy or quote.

Loss Runs

A loss run report is a insurance company report outlining the details of any claims for each policy period where they provided insurance coverage. This included date, description of claim, reserved expenses and incurred expenses.

LCM- Loss Cost Multiplier

Insurance companies file their LCM with each state. This factor represents the insurance companies adjustment to the actual expected claims expenses for each class code. The LCM represents the states expected expenses plus the insurance companies' own experience with expenses.


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U.S. Annual Cost of Workers' Comp & Average Rate Changes

How much is workers comp insurance?
The national average workers' compensation insurance rates have been on the decline.

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Visit NCCI for more resources and information about workers' compensation class codes. Visit United States Department of Labor for more information about government agencies managing workers compensation insurance rates.

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