Learn about rating elements used and how workers compensation premium is calculated

Workers Compensation Premium and Audit ReviewService:
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The Workers Compensation Premium Calculation is made up of many individual rating elements that come together in a rating formula ultimately used to develop the premium an employer pays for their individual workers compensation policy. The influence of individual state rating rules cannot be discounted. All rating formulas contain similar elements however you must understand that each individual state has it’s own approved method of calculating premium. Some of these may be quite different from others. Be sure to contact our office with your specific questions about an individual policy rating.

This is a very long webpage! On this page you will learn detailed information about the Calculation of Workers Compensation Premium, Common Rating Elements used, how premium calculations are developed and what an employer can do to better understand the rating process and how they can better manage the premium development phase of securing a workers compensation policy.

About Workers Compensation Rating Procedures –

It’s actually called a rating algorithm. The procedure or formula to follow that ultimately produces a policy premium. Correct application of the rating algorithm results in development of the annual premium an employer ends up paying for a workers compensation policy. All insurance company workers compensation rating programs are fully automated, at least we are not aware of any that are not. When an agent or broker or agency customer service representative (CSR) needs to rate a workers compensation policy for a client they will go on-line to their insurance company of choice and access that carriers proprietary workers compensation rating system. Enter some basic gathered information and generate a projected annual premium for the employer. Some carriers do a much better job than others. Some have comprehensive rating programs, uber simplified and streamlined for data entry by an agent, broker or CSR. You’ll find these type of company programs are highly sophisticated and capable of uncovering very specific risk characteristics for an individual employer based on the classification and descriptions provided of the employers operations. Unfortunately other insurance companies have very basic rating systems which rely heavily on agent, broker and CSR knowledge to gather, enter and accurately rate the workers compensation policy.

Regardless the method used to calculate the policy premium it is very important for company underwriters, agents, brokers, CSR’s and Employers to understand the individual rating elements, rating procedure or algorithm and how an accurate premium is calculated. Everyone that underwrites, sells or services a workers compensation insurance policy should know how to hand rate or calculate the policy premium.


Basic Rating Information or Data Required to Rate a Workers Compensation Policy –

Surprisingly, very little information is required to rate a policy. A simple policy may include a single classification code and the only other rating information required will be the correct rating payroll for the code.

To rate or calculate a simple policy may only require:

  • Identification of the correct classification code –
  • Rate associated with the correct code –
  • Assigned payroll associated with the class code –

The first step is to correctly identify the classification code. Refer to our page about workers compensation codes for more information related to classification codes and their impact on the rating process. Using proper classification codes is very important in the whole workers compensation process. Codes not only impact premium development but also are instrumental in development of correct experience modification rates or EMR’s and have a great impact on statistically developed rating factors like the ELR, Expected Loss Rates, Ballasting factors and ultimately individual code rates.

The second step is to identify the correct rate for the properly identified classification code. Each classification code carries its own rate per 100 of rating payroll. Each rate is then statistically developed from data gathered from all employers and exposures found within the code description.

The final step is then to multiply the rating payroll or remuneration by the rate for the appropriate class code to come up with the manual premium.

Here’s the simple rating formula for Manual Premium:

Rate by Classification Code x Rating Payroll / 100 = Manual Premium

For Example

$17.06 (Rate) x $300,000 (Payroll) / 100 = $51,800 (Manual Premium)

But the Manual Premium part of the formula is just the beginning. It becomes more complicated after this with the addition of multiple rating elements to the alogrithm or formula.

A Sample Workers Compensation Rating Calculation Formula and Example –

The column on the left represents the premium calculation algorithm or rating formula guide typically used for this particular state (Missouri). The column on the right represents an actual premium rating example of a Missouri carpentry risk with $300,000 of rating payroll, a 1.16 Experience Modification Rate, 5% Contracting Credit or CCPAP with 10% Scheduled Credit and a $1m/$1m/$1m Employers Liability Limit:


Basic Premium Rating Formula

  • Classification Rate
  • x Payroll / 100
  • = Manual Premium
  • + Supplemental Disease
  • + US Longshore & Harborworkers Charge
  • = Total Manual Premium
  • + Waiver of Subrogation Factor
  • + Increased Employers Liability Limit Factor
  • + Increased Employers Liability Balance to Minimum Charge
  • + Increased Employers Liability Admerialty-FELA Factor
  • + Employers Liability Voluntary Compensation Charge
  • – Deductible Plan Credit
  • = Total Subject Premium
  • x Experience Modification Factor or EMR
  • = Total Modified Premium
  • x CCPAP Factor
  • x Schedule Credit
  • + Disease Supplement Exposure
  • + Atomic Energy Radiation Exposure
  • + Non-Ratable Catastrope Load
  • + Aircraft Seat Surcharge
  • + Balance to Minimum Premium
  • + Balance to Minimum Premium Admiralty/FELA
  • = Total Standard Premium
  • – Premium Discount
  • + Coal Mine Disease Charge
  • + Expense Constant
  • + Terrorism Charge
  • + State Surcharge
  • = Estimated Annual Premium
  • + Audit Non-Compliance Charge
  • = Total Amount Due
Actual Premium Rating Example

  • $17.06 Classification Rate
  • x $300,000 Payroll / 100
  • = $51,180 Manual Premium
  • + 0 Supplemental Disease
  • + 0 US Longshore & Harborworkers Charge
  • = $51,180 Total Manual Premium
  • + 0 Waiver of Subrogation Factor
  • + $563 (1.10%) Increased Employers Liability Limit Factor
  • + 0 Increased Employers Liability Balance to Minimum
  • + 0 Increased Employers Liability Admerialty-FELA Factor
  • + 0 Employers Liability Voluntary Compensation Charge
  • – 0 Deductible Plan Credit
  • = $51,743 Total Subject Premium
  • x 1.16 ($8,279) Experience Modification Factor or EMR
  • = $60,022 Total Modified Premium
  • x .95 (-$3,001) CCPAP Factor
  • x .90 (-$5,702) Schedule Credit
  • + 0 Disease Supplement Exposure
  • + 0 Atomic Energy Radiation Exposure
  • + 0 Non-Ratable Catastrope Load
  • + 0 Aircraft Seat Surcharge
  • + 0 Balance to Minimum Premium
  • + 0 Balance to Minimum Premium Admiralty/FELA
  • = $51,319 Total Standard Premium
  • – 3.93% (-2,017) Premium Discount
  • + 0 Coal Mine Disease Charge
  • + $240 Expense Constant
  • + .02% ($60) Terrorism Charge
  • + .06% ($2,976 2nd Injury) State Surcharge
  • = $52,578 Estimated Annual Premium
  • + 0 Audit Non-Compliance Charge
  • = $52,578 Total Amount Due


A Detailed Explanation of Workers Compensation Rating Elements, Algorithms and Formulas –

As you can tell from the above sample rating formula guide there are many individual rating elements that come together to develop the total premium of a workers compensation policy. The elements shown in this example are common amoung most policy calculations. However you must remember not all of these may apply for your individual state. Or, your individual state may have additional rating elements not shown above.

In the section below, you will find a detailed explanation of the individual rating elements used in this example.

Classification Rates and Workers Compensation Codes –

There’s about 700 Workers Compensation Codes that have been produced for use. These codes describe in detail just about every work process known and are represented by a 4 digit number. Each class code has its own rate. Individual rates by code by state are developed through a statistical process which takes into account loss experience and audited payroll as reported to the rating bureau or advisory organization on Unit Statistical Reports received from insurance carriers who provide workers compensation coverage. The rating bureau produces advisory loss costs which are the statistically developed costs required to support the losses by class code. These advisory loss costs are provided to the subscribing state authority for approval or modification. Upon approval or modification by an individual state the loss costs are published for adoption by individual insurance carriers who then add their company expense and profit factors which results in the rate by code. It’s this rate that is used in calculating the premium for a policy.

Rating Payroll or Remuneration –

There’s more to rating payroll than just payroll! It’s actually called remuneration and includes a long list of items that are considered payroll when used in rating a policy. Visit our page on workers compensation payroll and remuneration for a comprehensive list of those items for your review. The rating payroll used is divided by 100 for use in the formula.

Manual Premium –

Manual premium is the result of multiplying the class code rate times the rating payroll divided by 100.

Supplemental Disease Load –

Based upon a request from the employer or insurance company and subject to the approval of the State of Missouri, an additiional charge or load for supplemental disease may be applied to the risk or policy. This would be performed due to a discovered increase in risk for a specific employer.

US Longshore and Harbor Workers Surcharge –

If the insured risk has an exposure to and requires USLHW coverage then the surcharge for this coverage extension is applied at this point in the calculation.

Total Manual Premium –

Total Manual Premium is the result of the manual premium plus surcharges and loading for supplemental disease and US Longshore and Harbor Worksers Act.>

Waiver of Subrogation Factor –

In our example state, Missouri, Waiver of Subrogation is not allowed. However for many states it is a common situation called for as a condition of contract under which an insured may be performing operations. When a Waiver of Subrogation is required a premium factor is added to the policy and a policy endorsement (WC 00 03 13) is attached. As a consideration for Missouri just because the waiver is not allowed does not keep the waiver endorsement from being used on the policy as it may still apply (in other states) where permitted by statute. Refer to our individual state rule pages for more information on Waivers of Subrogation. Charges for this waiver are determined by individual insurance carriers and filed with the appropriate state authority for use.

Increased Employers Liability Limit Factor –

Basic Employers Liability Limit is expressed as:

  • $100,000 Each Accident Bodily Injury By Accident
  • $500,000 Policy Limit Bodily Injury By Disease
  • $100,000 Each Employee Bodily Injury By Disease

Higher limits are available. When higher limits are used the increased limit factor is then included into the rating formula. In our example above the increased limit factor is 10%.

Increased Employers Liability Balance to Minimum –

When Employers Liability is increased over the standard limit of $100,000/$500,000/$100,000, as noted above, an increased limit factor is applied to the premium calculation. In addition there is a minimum premium for each increased limit level that must be met. In the above case the minimum is $120. When the factor is applied the resulting additional premium may not reach the minimum premium level. When this level is not met, the balance to minimum will be added into the rating calculation. For example, if manual premium is $957 and the increased limit factor is 1.10% the calculated additional premium would be $11. But the minimum premium for this increase limit is $120 so the balance to minimum charge would be $109 and show in the calculation.

Increased Employers Liability Admerialty-FELA Factor –

Increased Employers Liability Limits apply at a different level for those risks subject to Admiralty or FELA. The concept is the same as above in regards meeting minimum premium levels for this exposure.

Employers Liability Voluntary Compensation Charge –

A flat charge added for Employers Liability Voluntary Coverage / exposure in Monopolistic States.

Deductible Plan Credit –

Approved Deductible Plans are available for use in Missouri, our example state. When offered by the insurance company and accepted by the insured employer the deductible plan endorsement (WC 24 06 03) will be added to the policy. A premium credit will be applied to the policy premium calculation. In our example state the premium credit is applied before experience rating, schedule credits and premium discounts are applied.

Total Subject Premium –

The Total Subject Premium is the result of the Total Manual Premium plus Waiver of Subrogation, Increased Employer Liability charges and Deductible Plan credit.

Experience Modification Factor or EMR –

The Experience Modification Rate or Factor is a rating modification factor unique to an individual employer. It’s development is too complicated to go into on this page. Visit our entire section on this critical rating element by going to Experience Rating and the EMR.

CCPAP Factor –

The Contracting Classification Premium Adjustment Program aka CCPAP is a premium credit that’s not available in all states. The purpose of this credit is to provide a mechanism that can adjust the premium for an employer who pays their employees a higher than average hourly wage. Take for example two employers who perform exactly the same operations but one pays their employees $30 per hour and the other pays $12 per hour. When rating their workers compensation policy the same rate per 100 of rating payroll would apply giving the employer who pays the lower rate a significant advantage when in fact the opposite should apply. Think of the CCPAP as a method of leveling the playing field. This premium credit must be earned by the employer each policy period. Only operations who qualify under specific published construction classications can qualify for this program. Again, this program is not available in all states.

Schedule Credit –

The schedule rating plan is not available in all states. Eligibility is based on a minimum annual premium as indicated within the plan and the schedule rating factor is limited to a state by state maximum as shown on a published schedule rating credit table. Schedule rating not only applies to credits but also applies to debits. Risks eligible for this plan may have credits or debits applied to their premium typically based on seven individual risk characteristics which include:

  • Special Risk Classification Characteristics
  • Use of Safety Equipment
  • Employee Training
  • Management Attitude and Organization Towards Safety
  • Cooperation of Management with Insurance Carrier
  • Availability of Medical Facilities
  • Physical Characteristics of Facility and Premises

In above example Missouri credit/debit is capped at + or – 25%. In this case we used 10% credit.

Disease Supplement Exposure –

Based upon a request from the employer or insurance company and subject to the approval of the State of Missouri, an additiional charge or load for supplemental disease may be applied to the risk or policy. This would be performed due to a discovered increase in risk for a specific employer.

Atomic Energy Radiation Exposure –

Atomic Energy Radiation Exposure is treated specifically. A special rate is to be agreed upon by the parties involved including the Nuclear Regulator Commission, the involved government agency, insurance company and the contractor involved. Special rules apply for project work and special radiation exposure.

Non-Ratable Catastrope Load –

The non-ratable load is an additional charge or factor that represents the potential for castrophic type losses for a specific classification code.

Aircraft Seat Surcharge –

For aviation risks a per seat surcharge will apply that is charged in addition to the premium developed through the normal classification. The Aircraft Seat Surcharge is subject to a maximum per aircraft. Additional special rules apply to this surcharge. Specific charges and maximum are published on NCCI individual state rate pages. When coverage applies the Aircraft Premium Endorsement WC 00 04 01 is attached to the policy.

Balance to Minimum Premium –

Any adjustment to the premium calculation to meet minimum premium charges under the specific State Workers Compensation Act.

Balance to Minimum Premium Admiralty/FELA –

Any adjustment to the premium calculation to meet minimum premium charges under Admiralty or FELA.

Premium Discount –

This is a percentage discount that is developed based on the size of the Total Standard Premium for an individual risk. A policy is eligible for a premium discount when it exceeds minimum levels as established by their state authority.

Coal Mine Disease Charge –

For states subject to the Federal Coal Mine Safety and Health Act where disease coverage is provided. You will find that for those states special rules apply for application of rates and charges.

Expense Constant –

The expense constant charge is added to every policy without regard to premium size. Visit our Glossary – Terms Page for a much more detailed description of this additional premium charge.

Terrorism Charge –

A separate charge for Terrorism Coverage is applied to the policy. Terrorism premium is determined by dividing the employers payroll by 100 and multiplying it by the terrorism factor approved by the state in question.>

State Surcharges –

Some states have additional surcharges that are added to the policy. Missouri funds their second injury fund by having insurance carriers apply, collect and forward a specific surcharge to all workers compensation policies issued in their state. The 2014 rate for the Missouri 2nd Injury Fund is 6%.

Audit Non-Compliance Charge –

Many states allow special handling of non-compliant audits. That’s where an employer does not complete the audit after the expiration of the workers compensation policy. You see it’s only after the audit that a correct, final premium can be determined by using the audited premium exposure which consists of the actual payroll developed during the policy period. Missouri has recently inacted (2013) legislation that allows an insurance company to make a special charge that equals the original deposit premium. In other words they insurance company can double the premium, invoice the policyholder and proceed with collection of the additional premium due if the policyholder does not allow the audit to be completed. Some states allow a charge of up to three times!

Total Amount Due –

The total premium due after audit adjustment and after inclusion of any Audit Non-Compliance Charge.


A Recap of Premium Rating Calculations – What an Employer Should Know!

Remember, other states may use a different rating formula for calculating the premium on a workers compensation policy. Here’s a few points that an employer should know about the premium calculating process of a workers comp policy and a few tips that may help:

  • Do you know what consitiutes Workers Compensation Premium Exposure? – It’s payroll. More specifically it’s rating payroll that’s made up of more than just payroll. Look to our page on Workers Compensation Remuneration and Payroll for a detailed explanation of this term. Take the time and understand what rating payroll for your company means.
  • Is your business properly classified and are correct classification codes being used? – Rates used in the calculation of manual premium are published by classification code. If the wrong code is used to describe your business then your policy is being incorrectly rated. The use of incorrect codes also has a long reaching effect on Experience Modification Rates, a rating factor that’s also used in calculating your premium.
  • Verify Premium Rating Elements – Rating elements listed above combine to produce the premium on a policy. When rating elements are incorrect or improperly applied to the formula the result will be an incorrect premium. Premium Rating Elements should be verified for accuracy.
  • Have Your Premium Calculations and Audit Reviewed – Errors that occur in premium or audit calculation may go undiscovered. It is important to have your policy calculations reviewed by an Independent Workers Compensation Consultant.
  • Work with an Independent Workers Compensation Consultant! – When faced with Premium and Audit Calculation problems make sure you contact an independent consultant for help!


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