Workers' Comp Basics

How your workers' compensation premium is calculated—

Employee Classification

Employees are grouped according to the type of work they perform. Each group is assigned a business classification code to ensure that an appropriate rate is applied to all employees who perform similar duties. For example, file clerks have a lesser chance of sustaining on-the-job injuries (loss exposure) than employees engaged in construction, so a lower classification rate is applied to file clerks. This means that businesses may have several classification codes. For example, a printing shop could have different codes for the office staff, drivers and the press machine operators.

A designated workers' compensation rate is applied for every $100 in payroll under each classification. A base (manual) premium amount is then determined for the entire operation.

Experience Modification Factor

The experience modification factor, or mod, is a rate applied to the workers' competition premium of insured businesses.*

How we get there

The calculation of this rate includes the following factors: audited payroll by class code, 3 years or 45 months of prior policy loss data, and the rates established by the rating organization.

This rate calculation typically rewards businesses with good safety practices via a credit (reduction in premium) mod factor and penalizes those with poor safety practices via a debit (increase to premium). A credit mod is considered anything below a 1.00 and a debit mod is anything above 1.00. New businesses with no prior workers' compensation experience begin with a base (unity) mod of 1.00 until enough data and premium eligibility requirements are met.

Experience rating (the mod) recognizes and measures both the frequency and the severity of losses. This rating gives greater weight to accident frequency than to accident severity. So, many smaller claims have more impact than one large claim. This means that businesses with a higher occurrence (frequency) of injuries (losses) will usually have higher future workers' compensation costs.

For more detailed information on how experience rating affects your premium, please review this issue of CompEssentials that takes a closer look at mods.

The Formula

With these three elements, workers' comp premium is calculated by using this formula:

Payroll x Classification Rate = Manual Premium (x Experience Mod Factor) = Modified Premium

* For business that qualify for a mod. In most states, the National Council on Compensation Insurance (NCCI) determines the classification rates and the mod calculation. The premium calculation referenced above does not take into account dividend plans (e.g., Safety Rewards), payment plans, discounts and other programs that may be available.

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