Workers Compensation Insurance Costs Explained: Factors and Savings Tips

Workers’ compensation is an essential insurance policy for business owners who have employees. It is required by law in most states and protects employees by paying medical expenses if and when they get injured on the job. This article takes a closer look at what goes into the costs of premiums in a workers’ compensation policy.  

Average Workers’ Compensation Insurance Rates

Workers’ compensation costs vary widely from policy to policy because the rates are contingent on so many factors unique to your business. Searching online, we see that the average policy is $45 per month or $542 annually. But remember, rates are partially contingent on payroll, and the higher your payroll is, the higher your workers’ compensation premium will be. 

Here’s the average cost per $100 of payroll in each state in 2020 per the National Academy of Social Insurance.

Factors Affecting Workers’ Compensation Insurance Costs

Let’s look at some of the common things that affect your rate. 

Industry and Job Risk Levels

If your business or your employees’ jobs are in a high-risk industry, your rate will be higher. This is because high-risk jobs are more likely to file a claim due to an accident, and those claims can be for higher dollar values. This increases the risk to the insurance company, which will charge to mitigate the risk, 

State Regulations

Where you live will impact workers’ compensation insurance costs because each state has its own regulations that must be met regarding insurance coverage. 

Claims History

Your claims history will impact the cost of workers’ compensation premiums. When you have a history of claims, the insurance company determines that you are at a higher risk of having more claims. This increases the cost of insurance. 

Payroll Size and Employee Count

Payroll has a direct effect on workers’ compensation. The larger your payroll, the more your workers’ compensation rate will be. This is because the more employees you have, the greater your chances of having a claim. 

Calculating Workers’ Compensation Insurance Premiums

There’s a formula that every insurance company uses to determine your workers’ compensation rates. This formula is: 

Premium = Workers’ Classification Code Rate x Experience Modification Number x (Payroll/$100)

Let’s look at what each of these variables is and how they affect the rate:

• Workers’ Classification Code Rate: This is the rate determined by the risk of the job that each worker does. A secretary will have a lower rate than an electrician because there is less risk of injury.
• Experience Modification Number: This number is based on your claims history. The closer it is to one, the better it is for your rate because the insurance company sees you as having fewer claims. 
• Payroll: Rates are based on payroll size. The greater your payroll, the greater your workers’ compensation insurance costs will be.  

Ways to Reduce Workers’ Compensation Insurance Costs

Here are some ways to reduce your workers’ compensation insurance rates. 

Implementing Safety Programs

When you implement a formal safety program, the insurance company can document how you plan on reducing claims by having fewer injuries on the job. When workers follow safety protocols, they are less likely to get hurt. This can result in a discount on workers’ compensation insurance costs. 

Conducting Regular Safety Audits

In line with having a safety program, conducting safety audits can also get you a discount. The audit is a way to check on employees to ensure that everyone is following safety protocols and no one has decided to cut corners. 

Employee Training and Education

Employers who have regular training programs on safety can reduce their workers’ compensation rates with many carriers. Document when you have these trainings and outline what was discussed to present to the insurance company’s underwriter.  

Proper Classification of Employees

One of the reasons employers pay more than they need to is because they misclassify employees. Just because you run a roofing company, not everyone is at the same risk level. The actual roofer has a higher rate than the secretary or the outside sales representative who doesn’t climb on roofs. 

Shopping for Workers’ Compensation Insurance

Insurance agents and brokers are there to walk you through the process of getting workers’ compensation. A good agent or broker will conduct an interview to fully understand what your workers do and the payroll associated with each risk class. This ensures that everyone is classified correctly and you pay the correct amount. 

Choose a coverage option that works best for your company. While you may be able to get coverage as low as $100,000, you may want more coverage, such as $1 million or more, to properly protect your business assets in the event of a severe loss. 

With the right classifications and coverages, you can shop the policy around to see where you can get the best rates. Some insurance companies rate some jobs preferentially, meaning they accept the risk and want that business so rates are cheaper than competitors. Make sure you shop the policy in an apples-to-apples way to ensure you choose the right carrier. 

Frequently Asked Questions (FAQs)

How Often Should I Review My Workers’ Compensation Policy?

You should review your policy annually, at the very least. In fact, the insurance company will audit the policy to ensure that the right payroll amount is included in the calculations, and a bill will be sent for the difference. It is wise to contact your insurance carrier when you hire or fire people and payroll changes.  

Can I Adjust Coverage Levels Based on Business Needs?

Yes. You can adjust your coverage levels based on business needs. Contact your agent to make the policy adjustments. 

What Happens if My Claims History Improves?

As your claims history improves, your experience modification factor improves. This lowers the cost of your policy over time. 

Keep Workers’ Compensation Insurance Costs Low

Employers and business owners can keep the cost of workers’ compensation low by having a safe workplace. Encourage employees to follow safety protocols and have regular training to educate workers on what are dangerous practices. Shop for a policy among the best workers’ compensation companies on the market to get a reliable policy that is priced competitively.