How Much Does Workers' Comp Insurance Cost?
How Much Does Workers Compensation Insurance Cost?. Workers compensation rates are based on the nature of the insured's operations. The premium is based on the payroll for each classification.
The insurance company calculates the premium according to the Basic Manual for Workers Compensation and Employers Liability Insurance and all applicable rating plans. This workers comp cost manual contains rules, classification descriptions, rates/loss costs for each classification, and state-specific exceptions for writing workers compensation insurance.
This condition effectively makes the manual and the rating plans part of the policy. The insured must maintain payroll and other pertinent records and make them available for the company to examine at all reasonable times.
The premium is determined by multiplying the payroll by the applicable rate or loss cost, subject to certain minimums and maximums, special charges, discounts, and exceptions reviewed below.
How much does workers compensation insurance cost? The rates or loss costs apply to each $100 of payroll, regardless of the time period over which the payroll was expended.
For example, the premium charge for a payroll of $100,000 for one month is the same as the premium charge for a $100,000 payroll paid out over a 8-month period. If the rate for landscaping is $3.25, and the insured has 10 employees who each earn $500 per week, the basic premium is determined as follows:
- Weekly payroll $2,500 x 52 weeks = $130,000 total payroll
- $130,000 total payroll x 3.25 rate per $100 of payroll = $8,450 annual workers comp insurance premium
If the policy is written for less than one year or is cancelled, the manual rate is applied to the payroll expenditures from the effective date to the cancellation date.
However, some states and some insurance companies require short rate return premium calculations if the insured cancels the policy for reasons other than its going out of business.
How much does workers compensation insurance cost? Business auto physical damage includes comprehensive and collision insurance that covers the costs to fix or replace your vehicle if it is damaged, vandalized or stolen.
Below are some answers to commonly asked workers compensation insurance cost questions:
- How Much Does Workers Compensation Insurance Cost?
- What Are Workers Comp Payroll Exceptions That Reduce Cost?
- What Are Workers Compensation Payroll Limitations That Lower Premiums?
- How Do I Select The Right Workers Compensation Insurance Classification Codes?
- What Other Factors Can Affect Workers Comp Insurance Cost?
- How Can I Get A Discount On My Workers Compensation Premium?
- What Is Experience Rating In Workers Compensation?
- What's A Retrospective Rating Plan In Workers Compensation?
How Much Does Workers Compensation Insurance Cost?
The average price of a standard $1,000,000 Workers Comp Insurance policy for small businesses ranges from $29 to $297 per month based on location, industry, payroll and experience.
What Are Workers Comp Payroll Exceptions That Reduce Cost?
How much does workers compensation insurance cost? Workers comp insurance cost & premium calculations are usually based on the entire payroll amount, subject to the following exceptions:
Board, Lodging, Services–Bonuses, Commissions, And Tips
The dollar value of certain non-monetary items, such as board, rent, housing, merchandise, credits, and any kind of services an employee receives as compensation for services is included in the payroll used to determine workers compensation premiums.
The bonuses, commissions, and tips an employee receives are included in the payroll basis for premium calculations. Vacation pay, sick pay, holiday pay, all piecework earnings, and money received under incentive or profit-sharing plans are also included.
The insured should maintain payroll records so that overtime pay can be distinguished from and separated from regular pay. If it does, the payroll used to calculate for the applicable classification does not include overtime pay.
For example, assume an employee works 50 hours in one week. The rate of pay for the first 40 hours is $10.00 per hour. The employee receives time and a half or $15.00 per hour for the last ten hours. To determine the payroll amount to use to determine the premium, all hours worked are figured based on the straight time pay of $10.00 per hour for 50 hours.
What Are Workers Compensation Payroll Limitations That Lower Premiums?
In some states, premium is based on a certain amount of the average weekly wage for the payroll classification for each employee.
Payroll of Executive Officers
So how much does workers compensation insurance cost? In most states, the premium calculated includes executive officer payroll. The payroll is subject to a maximum for each individual rounded to the nearest $100. This formula and amount varies by state, and the amount a given state uses must be checked and determined. Each state establishes its own minimum amount.
For example, one state may use $1,500 per week for active officers and $2,000 per year for inactive officers.
State Exceptions on Executive Officers
In some states, executive officers who do not fall under the workers compensation laws because their employers are not-for-profit organizations or who are not covered for other reasons may elect to be covered. In some states, executive officers can elect to be excluded.
In states where partners are subject to the workers compensation laws or in states where partners may elect to come under the law, each partner's payroll is usually set at a flat amount, such as $25,000 per year.
In cases where these employees are subject to the workers compensation law and the policy covers them, the premium is based on the nature of the work or duties performed at the home.
Per Capita (Each Person) Premiums
Rates for a few specific classifications are on a per capita (each person) basis instead of a payroll basis. This approach applies to in-servants, out-servants, private chauffeurs, and occasional servants.
The occasional servant per capita rate applies when a servant is employed for less than half of the customary full-time hours.
How Do I Select The Right Workers Compensation Insurance Classification Codes?
How much does workers compensation insurance cost? The rate that applies to any risk is based on the classification that best describes the work performed or activities conducted. This is known as the "governing classification."
The governing classification includes the payroll of all employees engaged in a given operation, subject to certain exceptions reviewed below.
For example, a shoe manufacturer's governing classification is "Shoe or Boot Mfg." That classification includes the payroll of machinists, porters, and other employees, even though they do not actually make shoes.
If an employer has separate businesses and the operations require using two or more different classifications, the governing classification is the one that has the largest amount of payroll.
That governing classification then applies to the payroll of miscellaneous employees, such as maintenance employees.
There are five employee classifications specifically identified for rating purposes. These are known as Standard Exceptions, as outlined below:
- Clerical: These employees perform duties limited exclusively to office work performed in buildings or on floors separated from manufacturing or other operations. This classification also applies in cases where departments are separated by structural partitions from the employer's other work places.
- Salespersons or Collectors - Outside: These employees perform activities primarily away from the employer's premises. However, they do not deliver the employer's merchandise.
- Clerical Telecommuter Employees: These are employees who perform clerical functions at/from their homes. This class has grown exponentially due to COVID-19 as so many employees are working from home.
- Drivers, Chauffeurs, Messengers, and Their Helpers NOC - Commercial: These employees' principal duties are performed on or in connection with vehicles used in the employer's business.
- Automobile Salespersons
The payroll of employees who fall into one of these standard exceptions is not included with the payroll of employees engaged in the employer's regular business. Each standard exception is rated separately. These classes are not considered or used to determine the risk's governing classification.
Exceptions in Construction or Erection Work
A construction risk may include separate and distinct operations, such as masonry, drywall, or carpentry. In that case, each different and separate type of work is subject to a separate classification and rate.
The employer must maintain separate payroll records for each type of work in order for the separate classifications and rating to apply. If it does not, the entire payroll is assigned to the highest rated classification that applies to any part of the job.
The payroll of any one employee is not usually subject to division and is assigned to the highest rated classification. However, this rule may have exceptions in certain states and not apply to employees engaged in certain activities.
What Other Factors Can Affect Workers Comp Insurance Cost
The expense constant is a premium charge applied after all other premium calculations are complete. It offsets the higher expense factor on policies that have smaller premiums. In most states, the expense constant ranges from $100 to $200.
The workers compensation and employers liability insurance policy states that the final earned premium is based on the rules, classifications, rates, and rating plans in the rating manual of the rating organization that has jurisdiction. The exact payroll for the policy year cannot be determined in advance. Because of this, the policy is written with a deposit premium based on the insured's estimated annual payroll for each classification.
The insurance company audits the insured's payroll records after the policy expires. If the audit determines that the earned premium is larger than the deposit paid at inception, the insured pays the difference. On the other hand, if the final audit premium is less than the deposit, the insurance company refunds the excess to the insured.
Depending on the insurance company and the amount of premium, an audit may be waived completely, and the deposit premium becomes the final or flat premium. In other cases the insurance company may ask the insured to submit voluntary payroll information in place of a formal audit. That information is the basis of the final audit and premium adjustment.
The insurance company and any rating organization that has jurisdiction has the right to audit and examine the insured's records, ledgers, contracts, and tax reports that relate to the premium or employee payroll. This right applies during the policy period and for up to three years after the policy expires.
Interim Premium Adjustments
Larger risks may be written subject to more frequent payroll audits to determine the premium. This is almost standard procedure on larger construction risks. In this arrangement, the deposit premium charged is less than the estimated annual premium.
As a result, payroll records are audited periodically, such as semiannually, quarterly, or monthly. Policies written on this basis usually have minimum deposit premiums based on the frequency of audits and interim premium adjustments. For example:
- Monthly audit - The deposit premium is at least 25% of the estimated annual premium.
- Quarterly audit - The deposit premium is at least 50% of the estimated annual premium.
- Semiannual audit - The deposit premium is at least 75% of the estimated annual premium.
Any policy subject to interim audits cannot have a deposit premium that is less than the policy minimum premium. The minimum premium varies from state to state and the insured must pay premiums after each interim audit is completed. In cases that involve interim audits, the deposit premium is held and applied to the final audit.
Under this procedure, the insurance company may waive actual interim audits and the premium is determined based on payroll statements that the insured prepares. The insurance company conducts the actual audit for the entire policy period after the policy expires.
Each manual classification has its own minimum premium. This premium applies even if the actual audited payrolls develop a lower earned premium, except in cases where a policy is cancelled before the normal expiration date. Only one minimum premium applies to each policy.
The highest minimum premium applies to policies that have more than one classification.
Many states have developed deductible plans to apply to workers compensation insurance. This is an attempt to respond primarily to the rapidly rising medical costs and the resulting increase in workers compensation premiums, and to encourage employers to develop and implement workplace safety measures.
Some plans apply the deductible to the indemnity amount paid to the injured employee. Others apply the deductible to medical expenses only. In some cases, the deductible applies to both indemnity and medical expenses.
Drug-free Environment Discount
Some states require applying a discount or credit to the workers compensation premium of employers that provide and enforce a drug-free workplace.
Three-Year Fixed Rate Policies
Some states permit writing policies for a three-year term in cases where the premium is relatively small and the insured and insurance company agree to do so. These policies use the rates in effect at inception and apply for the entire three-year term, regardless of any rate changes during the period.
The deposit premium is based on the current manual rates applied to the projected three-year payrolls.
How Can I Get A Discount On My Workers Compensation Premium?
How much does workers compensation insurance cost? On larger risks with more payroll, a discount is allowed on the portion of the premium that exceeds a certain minimum amount. This discount reflects the lower expenses for the insurance company to handle larger risks and varies from state to state.
The discount percentage increases in direct proportion to the premium size. Each state has separate premium discount percentage tables that apply to premiums for coverage that stock insurance companies write as opposed to non-stock insurance companies.
In nearly every state, the premium discount is based on the total premium for all states that the policy covers. As a result, the premium discount applies on an interstate basis. This means that each state has a different discount percentage that applies to the portion of the premium that state develops.
What Is Experience Rating In Workers Compensation?
How much does workers compensation insurance cost? In order to encourage employers to reduce the frequency and severity of industrial accidents, most states have a method that awards risks that have better-than-average experience and penalizes risks that have poorer experience.
This is the experience rating plan. It penalizes accident frequency to a greater extent than accident severity. For example, a risk that has ten losses of $10,000 each for a total of $100,000 develops a larger experience debit than an identical risk that has one incurred loss for $100,000.
Experience rating is calculated by the rating organization that has jurisdiction that maintains detailed loss records for all risks eligible for experience rating. An individual employer's loss experience is compared to the average loss experience for the industry and a factor known as the experience modification is developed.
This factor modifies the premium developed by the manual rates that apply for the classification(s) involved and applies for the entire policy term. It is expressed as a decimal, so a 0.70 factor produces a 30% credit and a 1.20 factor produces a 20% surcharge or debit.
The experience modification rewards employers that have superior loss experience with lower premiums and penalizes risks that have poor loss experience. The experience modification calculation formula is fairly complicated and applies only when the manual premium is higher than a certain threshold amount.
This is because loss experience on larger risks is more credible than for small ones. The minimum premium threshold for eligibility for the plan is different in each state.
The experience rating formula does not include loss experience for the first year before the current policy period. This is because those losses are relatively "green" and have not developed sufficiently. Risks large enough to qualify for experience rating are automatically subject to the plan.
The insured cannot decide to not be eligible for experience rating or decline to have the modification applied.
Some risks have operations in more than one state. In those cases, the experience rating plan automatically applies on an interstate basis if the risk qualifies for experience rating in any state where the insured conducts operations.
In such cases, one experience modification is calculated and applies to the entire manual premium for each state where the insured has operations.
Interstate experience modifications are calculated and published by the Interstate Rating Bureau of the National Council on Compensation Insurance, except for monopolistic states and certain other states.
What's A Retrospective Rating Plan In Workers Compensation?
How much does workers compensation insurance cost? Retrospective rating provides a way to adjust the premium for a current policy based on the losses incurred during its term. For example, an insured may choose a retrospective rating plan to recognize its favorable loss experience during the current policy period, compared to unfavorable losses incurred during the experience period used to develop the experience rating modification.
It is also possible to apply a retrospective rating plan to a policy to develop a higher premium because of unfavorable loss experience. Retrospective rating plans always apply to a policy to modify the premium after applying the experience rating modification.
With risks that qualify for experience rating, the premium for the current policy is modified to reflect the experience debit or credit. The risk can apply the retrospective rating plan if the standard premium meets a certain premium threshold. In that case, the experience rating premium is adjusted based on the losses incurred during the current policy term.
The retrospective rating plan is a form of "cost plus insurance." It attempts to charge a premium based on the actual cost to insure a risk by calculating the incurred losses and then adding the insurance company's operating expenses and taxes.
The premium discount rule reviewed above does not apply to any policy subject to a retrospective rating plan because the factors in that plan automatically reflect the effect of the premium discount rule. Policies subject to retrospective rating have a final premium that falls somewhere between predetermined maximum and minimum premiums the insured selects in advance based on the standard premium.
The variations in the final retrospective premium for a given policy depend primarily on the losses incurred during the policy term. Regardless of the premium calculation basis selected, the following formula is always used to determine the final retrospective premium:
Retrospective Premium = [Basic Premium + (Standard Premium x Excess Loss Premium Factor x Loss Conversion Factor) + (Losses x Loss Conversion Factor)] x Tax Multiplier.
The elements in this formula are:
- Basic Premium: covers insurance carrier expenses, other than taxes. It also includes acquisition, audit, and administration expenses, as well as profit or contingencies.
- Standard Premium: is the premium at manual rates modified by only the experience modification factor.
- Excess Loss Premium Factor: establishes a limit, such as $10,000, representing the maximum amount for which any single loss will be included in the retrospective rating premium calculations. The carrier pays the total loss amount, but the actual loss is limited in the formula to the loss limitation selected. This reduces the impact of a single large loss on the final premium.
In some states, a risk must develop a minimum premium threshold amount to qualify for a loss limitation. When the loss limitation is selected, the premium charged that recognizes the loss limitation is included in the retrospective premium formula above by means of the "excess loss premium factor."
- Loss Conversion Factor: is a factor used to reflect claims adjustment expenses.
- Losses: are claims incurred during the policy term and included in the formula, subject to the pre-selected loss limitation.
- Tax Multiplier: covers the premium taxes the insurance company pays.
The premium developed by applying the rating plan cannot be more than the previously selected maximum premium or less than the previously selected minimum premium.
Each element of the retrospective rating formula is determined based on the individual risk, subject to approval by the rating organization that has jurisdiction, considering the states involved. Retrospective rating is suitable for risks that have significant premiums and may be applied on an interstate or intrastate basis.
In addition, some retrospective rating plans can also include premium and losses for other lines of insurance, such as third-party liability coverages or automobile physical damage coverage.
The insured has the option to have the retrospective rating plan apply for a three-year policy term. In these cases, the same insurance company must write the successive annual policies. The same options available for one-year plans are available for three-year plans.
Three-year plans involve lower basic premium factors than one-year plans. Three-year plans have the advantage of spreading out losses over three years and poor experience in one year could be offset by better experience in the other plan years.
The retrospective rating plan to be used must be selected before the policy effective date.
These plans give the employer the advantage of obtaining the benefit of lower loss ratios during the policy's term because the final retrospective premium is based primarily on incurred losses with only a relatively small charge for the insurance company's operating expenses.
How Much Does Workers Compensation Insurance Cost? - The Bottom Line
So how much does workers compensation insurance cost? Workers' comp insurance premiums depend on your business' unique operations and risks. There is no standard cost for workers' comp insurance. Several factors affect workers' compensation costs, including: your state, your payroll, your industry and claims history.
Speak with an experienced commercial insurance broker to find the best workers comp policy for your business at the lowest cost.
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Get useful tips and information about how much commercial insurance costs, small business risks and exposures, how insurance regulations effect your businesses' and detailed descriptions of coverages and exclusions and more. Most small businesses need to buy the following four types of insurance at a minimum to cover their operations from every day risks:
Property Insurance: This policy covers a business if the property used in the business is damaged or stolen as the result of common perils like fire or theft. Commercial property insurance covers the buildings, structures and also business personal property - which includes furniture, inventory, raw materials, machinery, computers and other items.
Liability Insurance: Any company can be sued. Slip-and fall lawsuits are very common and be costly. Customers can claim you injured them or damaged their property - and lawsuits are very expensive. Commercial liability insurance pays damages and can include attorney's fees and other legal expenses. It also ca pay for the medical bills of injured third parties
Commercial Auto Insurance: For vehicles owned by the business. Commercial auto insurance pays bodily injury or property damage costs for which the business is found liable - up the the policy limits for liability and property damage.
Workers Compensation Insurance: In almost every state employers must provide workers comp when there are W2 employees. Workers compensation pays for the medical care of employees and can replace a portion of lost wages - regardless of who was at fault for the injuries.