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Annual premiums for workers' compensation insurance can cost a small business anywhere from a few hundred dollars to a few thousand dollars per $100,000 in payroll, depending on factors like the business’s industry, location and claims history.
While your final cost for is up to experienced actuaries, understanding how it is calculated can simplify the insurance process for your small business — and save you money along the way.
Multiple factors go into calculating insurance premiums. Here are the most common considerations for workers’ compensation insurance.
Many states have requirements for when a business must provide workers’ compensation insurance to employees. Some states require coverage with just one employee, while others don’t require it until a business hires a minimum number of employees.
Some states have requirements for which types of employees you have to cover. For example, California requires all employees except those meeting independent contractor status to receive workers’ comp benefits. In states where there is a distinction between which types of employees must be covered, your employees’ classifications can directly affect your workers’ compensation premiums.
Takeaway: Understand the requirements in the states where you do business.
The type of work a small business performs has a significant influence on workers’ compensation insurance premiums. Because some industries have more risk — think of the dangers of crab fishing compared with those of data entry — certain types of businesses will always have higher premiums than others.
The good news is that insurance companies have a consistent way to evaluate industries’ potential risk. Each industry is assigned a classification code based on its type of work. Farming, for instance, can be broken up into multiple industries based on the final products, such as vegetables, eggs or flowers. Because each type of farming has its own methods that carry its own risks, each type is given its own classification code.
For each of these codes, the analyzes historical data to determine the average cost of each industry’s workers’ compensation claims in each state, says Jeff Eddinger, senior division executive with the NCCI. This allows insurance agencies to determine the financial risk of a business’s industry, which is represented as a rate per $100 of payroll. For example, if pet sitting has a rate of $2.19, that means an insurer can expect to lose that much in workers’ compensation claims for every $100 a pet-sitting business pays its employees. But even that isn’t always straightforward.
Industry rates can become more complicated for businesses that hire employees to perform different types of work. A pest control company, for example, might hire four employees to treat residential areas but also have two clerical employees in the office to handle the paperwork.
In cases like these, Eddinger says, where a business has employees that perform different types of work, it will fall under a governing classification that most closely captures its primary industry, but each employee is rated for premiums based on their type of work.
If the pest control company is based in Georgia, the four employees that spray yards will be rated around $2.82 for every $100 of payroll. However, because the office staff has much less risk when it comes to potential workplace injuries, these two employees will be rated only around 8 cents for every $100 of payroll. This not only allows insurers to more comprehensively assess a small business’s risk but it also fairly prices workers’ compensation premiums.
Keep in mind, Eddinger says, that for the majority of states these costs consider losses only and don't take into account insurance companies’ internal expenses. The additional costs added to these industry rates will vary when insurers calculate premiums.
Additionally, some states use their own industry rates instead of the NCCI rates, which creates even more variety among industry rates — and premiums — between states.
Takeaway: Industries with a higher risk of injury have higher premiums.
If employees are doing additional activities that can increase their risk of a workplace injury, this can mean higher workers’ compensation premiums as well. This is especially relevant for businesses where employees drive to worksites.
"If there’s a plumber who also drives a decent amount as part of their job, they’re not just working on one site," says Sandra Kipust, senior director and actuary with Liberty Mutual Insurance. "They’re traveling from house to house to house doing their work."
Vehicle accidents can also lead to workers’ compensation claims, Kipust says, which is why driving is considered a riskier activity. So the more employees who spend time on the road, the higher your premiums are likely to be.
Takeaway: Driving to job sites and other additional activities can raise premiums.
The more employees a small business employs, the more potential exposure it has to workplace injuries. It makes sense then that the more employees a business has, the higher its premium will be.
Payroll also affects premiums with respect to wages. If an employee is unable to report to their job because of a workplace injury, workers’ comp insurance can pay the employee for lost wages. How much an employee can receive as part of lost wage replacement is a matter of state requirements and the employee’s current pay rate, which means higher salaries can lead to higher losses for insurance companies.
Takeaway: More employees means more risk and higher premiums.
Insurance providers also look at a business’s risk as an individual company by calculating its experience modification rate, or EMR. An EMR looks at how many previous workers’ comp claims a business has and how severe they were in terms of cost, then quantifies those in terms of risk.
"An EMR looks at frequency and severity separately so that it’s a fair calculation and fair assessment," Kipust says. "Prior loss experience is probably the most predictive variable for future losses."
But claim frequency doesn't communicate the same risk to insurance companies as the severity of previous claims. Because multiple workers’ compensation claims indicate a less safe workplace, a high number of workers’ comp claims can impact your premiums, even if they were for small payouts. This means, with all other factors being equal, if two companies provide identical services, the company with 10 claims for $3,000 each will be considered a greater risk than the company with one claim for $30,000.
"If there’s a higher potential for loss, then premiums are higher," Kipust says. "It really does go hand in hand."
Takeaway: Your company’s workers’ comp claims history will affect premiums.
Workers’ compensation premiums are also partially based on where a business operates. Because some states use the NCCI classification codes while others use their own system, the familiar real estate advice of location, location, location has some sway in this regard.
According to a report released by the National Academy of Social Insurance in 2020 (covering data through 2018), the five states where businesses paid the most on average for workers’ compensation premiums were, in descending order, Alaska, Montana, California, Hawaii and South Carolina.
But many industries have consistently higher rates regardless of location. While the industries that make the costliest premiums list will vary slightly by state, industries that generally have higher premiums include security services, electrical services, construction and telecommunications repair.
The states where businesses paid the least on average for workers’ comp premiums were Washington, D.C., Texas and Ohio, with Indiana and Arkansas following closely behind. However, not all of those rankings use the same rates. Indiana uses its own state rating system rather than the NCCI rates, which means that businesses in Indiana might pay lower premiums in certain industries compared with those in states with similar statistics.
Additionally, some states like Ohio prohibit private insurers from providing workers’ compensation coverage and require businesses to purchase coverage through a state-operated fund. These so-called monopolistic states include Ohio, North Dakota, Washington and Wyoming.
When it comes to certain industries, office-based jobs tend to have the lowest premiums because of their reduced risk of severe injury. Clerical work in particular is an industry with consistently lower rates for workers’ compensation coverage.
Despite a good deal of workers’ compensation premiums being determined by a business’s industry, there are ways a business can lower its premiums and save money when it comes to workers’ compensation.
Creating an environment that focuses on safety has the potential to save a small business money in two ways. Some insurers consider a business’s culture and how an employer promotes safety with training and programs. Not only can this save a business on its initial premium by showing an initiative toward employee health, but by emphasizing safety with employees a business also lessens the likelihood of preventable job injuries.
A business can avoid overpaying on premiums by verifying its employees’ job descriptions and classifications and ensuring that it provides accurate information to pay the right premium for the right coverage. Most insurers will perform an audit at the end of the year to verify you didn’t overpay, but you can save yourself money and trouble throughout the year by updating your insurer about any payroll changes to ensure your premium is always accurate.
Employees who suffer a workplace injury cannot return to work before they are cleared medically, but there are things a business can do to help an injured employee return to work.
Report workers’ compensation injuries as soon as possible and assist affected employees in receiving the right treatment, Kipust says. Look for how you can accommodate an injured employee to allow them to return to reduce a prolonged workers’ comp claim and help your premiums in the long run.
Some insurers now offer pay-as-you-go options to keep small businesses from estimating their payroll for the year and potentially overpaying throughout the year. A pay-as-you-go option also allows businesses to break up annual premiums into smaller payments for a more cash flow-friendly method.