You might be curious about how insurance companies arrive at the number on your bill. It’s also important for you to understand the factors that influence your premium, so you can begin taking steps to control costs. Calculating your work comp premium can be complex, but it doesn’t have to be a mystery. Three main factors determine your premium and understanding them can add up to savings.
Work comp carriers estimate and audit your premium based on your company’s:
- Classification Rate
- Experience Modification Factor (E-mod)
A simple formula to remember is:
Payroll x Classification Rate (per $100 of payroll) x E-mod = Premium
Payroll is the basis for establishing your work comp premium. For every $100 of payroll, companies charge a specific rate based on the type of work your employees complete. Work comp policies are often issued with estimated payroll figures for the policy period and audited at the end of the period to determine the actual payroll. The difference between the audited and estimated premium is then billed or returned.
Payroll is multiplied by the base rate for each classification code in your business. Base rates are unique to each state, industry and carrier. To determine base rates, carriers in most states, including Missouri, reference an actuarial calculation provided by the National Council on Compensation Insurance, a work comp rating and data collection organization. NCCI has more than 600 classification codes for the work in your business to help ensure you pay the appropriate price for your level of risk.
Experience modification factor
An experience modification factor, or e-mod, is a calculation that uses your past loss experience to predict whether you’re likely to have losses better or worse than the average for your industry. In states that have adopted its use, such as Missouri, e-mods are calculated by NCCI.
If your e-mod is higher than 1.0, it means your losses are worse than what’s expected for your type and size of business, and you can expect to pay more work comp premium for a period of time. If your e-mod is less than 1.0, it means your losses are better than what’s expected, and you expect to pay slightly less than your competitors. You have the opportunity to improve your e-mod over time by maintaining a safe workplace and managing claims costs.
Many factors influence your final premium. Not all work comp insurance companies are the same and each may offer different premium adjustments for a variety of items. Modified premium is premium after application of the e-mod, but before application of other credits and/or debits. You can still estimate your premium without taking these factors into account. Just remember that the final premium may vary depending on the adjustments.
While you may not be able to directly control factors such as the classification rate assigned to your particular work, or the inherent safety level of the industry in which you operate, there are steps you can take to reduce your work comp premium.