How your workers’ compensation premium is determined
Because premiums for workers’ compensation insurance are based on estimated payroll, it’s seldom possible to determine the exact premium in advance. The premium is initially calculated using estimated payroll provided when the policy is issued.
Employee Classification
Employees are grouped into classification so that each classification reflects the risk of loss common to those employees. With very few exceptions, it’s the business of the employer that is classified, not the separate jobs, services, occupations, or operations within the business.
Basis of Premium
In its simplest terms workers’ compensation premium is based on payroll, with each state adding and/or subtracting specific elements.
Included: Total remuneration (meaning the monetary value at which service rendered is recompensed) and includes the market value to the employee of store certificates, merchandise, credits, or any other substitute for money, bonuses, including stock bonus plans, Christmas gifts or other gifts to employees, commissions, wages paid during holidays, vacations or illness periods, wages paid on the basis of piece work, and extra wages paid for overtime worked except that portion above the regular rate of remuneration.
Excluded: The following types of remuneration are not included: tips or gratuities, dismissal and severance pay, Davis-Bacon and other state and local prevailing wage laws paid into a qualified pension or trust under Internal Revenue Code sections 401(a) or 501(a).
Experience Rating
Experience rating is a mandatory plan used to tailor the cost of workers’ compensation insurance to the actual loss experience of an individual employer. The modification acts like a safe driver discount plan. It compares the losses and safety results of your business to other similarly classified businesses in your state. The result of this comparison is the experience modification factor. Fewer losses and accidents than average for your industry in your state will result in an experience modification factor lower than 1.00. More losses and accidents than average will result in an experience modification factor higher than 1.00. Experience rating is used most states. The appropriate rating bureau for each state calculates and publishes the modification.
Experience rating does not apply to every business. To be eligible for experience rating, each state has set a minimum premium threshold. The application of an experience modification and/or the availability of any newly erected bureau standard classifications is based on the anniversary rating date of the policy.
Intrastate Modifications:
- A risk qualifies for an intrastate (single) state basis when it meets the premium eligibility requirements for the state in which it operates.
- A risk qualifies for experience rating for an interstate (multistate) basis when it:
- Meets the premium requirements for an intrastate rating in any one state, and
- Develops experience during the experience rating period in one or more additional states where the NCCI Plan applies or where the independent rating organization plan permits coordination for interstate rating.
California – The WCIRB does not combine experience of any other state for the purpose of calculating a California experience modification.