Pricing A Workers Compensation Policy – Learn How Premium is Determined

Pricing a workers comp policy does not have to be a complicated process. Workers Compensation premium is determined by completing the rating process which includes gathering some specific rating items. In this post we’ll talk about those items.

Something to consider. There’s a difference between an employer who has been in business for several years, who may be experienced at working with commercial insurance and an employer who is new in business and has never bought a commercial insurance policy before. The more seasoned employer will have gone through this process and will be somewhat familiar how pricing a policy works. But when searching for a policy for the first time an employer will usually begin by contacting someone they know that’s in the insurance business. It may be their personal auto agent or homeowners agent or they may contact a local agent who was referred to them. Choosing an agent is an important step.

Regardless the who what or why, here’s the items an agent will need to correctly price a policy:

  • The Business Entity. Is the business a Corporation, LLC, Sole Proprietorship (Individual) or Partnership?
  • Ownership Inclusion or Exclusion. Depending on the business entity and the state in which the business is located or conducting business, owners may or may not be required to be included within the state workers comp act. They may, again depending on the entity type, decide to exclude themselves from or include themselves within coverage. This will need to be known. Simply, is the owner or officer to be included or not. And keep in mind, sometimes it’s not their decision but mandated.
  • Ownership Rating Payroll. Most states have some form of fixed amount, annual or monthly designated rating payroll to be used for owners, officers and members when included in coverage.  This rating payroll will have to be known if they are to be included in coverage and rated on the policy. Check out our individual state rules pages for details about your specific state.
  • Projected Payroll For Employees. A workers compensation policy is an audited policy. That means the premium at the begining of the policy is a deposit premium and not the final premium. The final premium is only developed after the end of a policy period after an audit determining the actual payroll has been conducted. Projected payroll is important! It’s what the original policy premium is based on. It will change.
  • Classification Codes. These codes are published by each states governing authority. Most of the states use NCCI, their rules, codes and even rate making advisories developed. Some do not. Regardless who or where the codes come from this is a very important part of the rating process. The codes describe specific job functions and are used to classify the employees on the policy for rating.
  • Rate per $100 of Payroll. Once the proper classification code has been determined the associated rate for that code will be used to calculate the base premium. Under some circumstances separation of payroll may be allowed where a single employees pay may be spread over different codes. This is typically not allowed so be aware! But in some states, usually in the construction industry, it may be and can be a way of controlling premium. But that’s another topic.
  • Previous Experience. An underwriting issue. Most insurance companies will have guidelines as to the acceptability of a new client. You may find that some will not take on a new workers comp client if they have not had continuous insurance for a period of 3 years or longer. Some will take on new clients with no prior coverage.
  • Schedule Credit. A rating factor determined and applied by the insurance company based on specific management, safety and experience factors evidenced by your company.
  • Loss History. Another underwriting issue. Insurance carriers will as a general rule require the submission of hard copy loss runs with the application for coverage.
  • Experience Modification Rate. E-Mod, EMR, Experience Mod Factor, call it what you like. For those who are experience rated this factor will be supplied by the rating authority in your state. Lets just say this is your grade card. It’s a somewhat complicated process where your specific claims are compared to the normal claims for the type of work you do. An E-Mod can be a debit mod or credit mod. There are important changes happening in the calculation of the E-Mod that you can read about here. If you have an E-Mod, you’ll know what it is!

Those are the basic items an agent will need to know to rate a workers comp policy. Of course it can much more complicated than that. But it can also be that simple depending on your specific needs and circumstance.

Hope this helps out!