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4 Factors Affecting Your Worker’s Compensation Premium


Let’s be honest, sometimes it is hard to understand how insurance premiums work. How the company decides the premium for the exposure they assume through the contractual transfer of risk is complex.  Personal Lines policies, such as home and auto insurance, are usually calculated by a computer algorithm. This accounts for different rating factors depending on the policy. These can include your home’s proximity to fire hydrants or a fire station, your claims history, or your driving record.

With commercial operations, your insurance premiums may positively change by adhering to an underwriter’s recommendations and requirements. These suggestions make your business a better risk for the company and incentivize more aggressive pricing.  While this process can at times appear subjective, it is not arbitrary. Consistent risk analysis factors are used for consideration when determining a price that is both affordable for you while allowing the company to maintain profitability and the solvency required to fulfill their promises to policyholders and pay claims.

Policy Cost Factors

The premium you may have the most control over is perhaps that which is associated with your Worker’s Compensation Insurance.  The cost of your worker’s compensation policy is driven by 4 factors:

  1. The company’s rate per $100 of remuneration.

    This is how the company calculates what the base premium on the policy will be before other factors are applied.  The rate per hundred indicates the company’s filed rate for the specific classification of job description for your employees.  Classifications can be very specific. A company may have multiple classifications when workers with different job responsibilities are working within the same company.  The more payroll you have, the more premium you will pay.  For example a company may be rated as follows:

Office, Clerical –  $100,000 annual remuneration @ $.60/$100 (1,000)$.60= $600 base premium

Machinery Operations – $1,000,000 annual remuneration @ $10.00/$100 (10,000)$10,000 = $100,000 base premium

  1. Experience Modification Factor/Merit Rating.

    In the State of Pennsylvania, if your worker’s compensation premium is large enough, you will be issued an Experience Modification Factor.  Your current modification factor is based on a rolling average of the past three years. The factor you receive is affected and dictated by your claims occurrences.  The classification your payroll falls within may have a modification factor as low as .7, for example, or as high as 1.5 or more.  This means good claims experience can result in your modification factor providing you with a 30% policy credit ((premium)0.07).  To the contrary, if you have had severe claims, you may have a 1.5 modification factor, resulting in a policy debit (surcharge) of 50% ((premium)1.5).  If you have a worker’s compensation policy with a smaller premium size will be assigned a merit credit or debit of +/-5% based on your claims experience.

  2. Safety Committee Credit.

    If you have a larger workers compensation policy, you may be able to save a significant amount of money by implementing a safety committee comprised of 4 or more people which must include representatives from management as well employees.  In the state of Pennsylvania a 5% credit is available for companies who implement monthly safety meetings.

  3. Schedule Credits.

    Other premium modifying factors are the schedule credits or debits that an insurance company files for.  The company can evaluate the un/favorability of the risk and either apply a policy credit or debit .  Many times schedule credits and debits are not used, however, operating your business within industry best practices, conducting loss control analysis on a regular basis and taking other measurable initiatives to provide the safest work place possible for your employees, are all things that make the case to an underwriter to apply additional crediting to your worker’s compensation policy.

Its important to understand how your Worker’s Compensation premiums are calculated so you can better understand how you may be able to positively affect your company’s bottom line by taking advantage of the various ways to keep costs in check.  A licensed insurance agent in your state can help you to determine areas where you may be able to manage costs more effectively.