How are Workers' Compensation Premiums Calculated?

Understanding how workers' compensation insurance premiums are determined is very important. Many calculations and comparisons are needed in order to customize each employer's insurance premium. These calculations and comparisons ensure employers in low hazard industries pay smaller premiums than employers in high hazard industries. They also ensure employers with few claims and good safety records pay less than employers with many claims and undesirable safety records.

The National Council on Compensation Insurance (NCCI) keeps the statistics necessary to differentiate high and low hazard industries and to differentiate high and low hazard employers within the same industry. The NCCI does this by combining the statistics of hundreds of insurance carriers in several states including Missouri. Each insurance carrier writing workers' compensation in Missouri keeps a claims record for each of their clients. At the end of each client's policy year, the carrier sends the client's claims record to the NCCI. This pool of statistics is then used to help calculate experience modifiers, rates and classifications.

High hazard and low hazard industries are distinguished by the classification code they are assigned to and the manual rate they pay for workers' compensation insurance. The classification code and corresponding manual rate are the first factors used to customize an employer's insurance premium. If an employer is assigned to a high hazard code such as roofing, trucking or logging the employer will pay a higher manual rate than employers assigned to restaurant, clerical or light manufacturing codes. Manual rates vary widely from one classification code to another and are expressed as a dollar figure per $100 of payroll. It's easier to look at rates, however, as a percentage of payroll rather than per $100 of payroll. For example; $13.71 per $100 of payroll is simply 13.71% of payroll. Next is a chart of some average manual rates for typical Missouri industries:

Each classification code may represent entirely different industries or segments within different industries. For example, Code 2501 Clothing Manufacturing represents an entire industry, but code 8810 Clerical Office Employees represents a segment of employees within many different industries. There are three classifications considered standard exception codes: code 8810 Clerical Office Employees; code 8742 Outside Salespersons, Collectors or Messengers; and code 7380 Drivers, Chauffeurs and their Helpers. These standard exception codes can be separated from an employer's main classification code because employees engaged in these jobs are normally not involved in other operations.

After an employer's operations have been assigned a specific classification and rate, their manual premium is determined by multiplying the employer's payroll by the appropriate rate. Throughout this discussion, a hypothetical employer "ABC Trucking" will be used to show how the entire rating system works. In this example, ABC Trucking has a $453,000 payroll and is classified as code 7229-Trucking-Long Haul. Their manual premium would be 453,000 x 13.71% or $62,106. All employers' workers' compensation premiums are based mainly on their manual premium. There are often adjustments made to the manual premium that will be discussed later.

A company's classification code is usually determined by its insurance agent or insurance carrier. The NCCI defines the scope of work performed in each classification code and makes the definitions available to insurance agents. These definitions are contained in the "Scopes of Basic Manual Classifications" manual which insurance agents use to classify their employer clients. Since many classifications are very similar, codes are sometimes difficult to determine. In these instances, an insurance agent or carrier may ask the NCCI to physically inspect a specific employer's operations and make the final classification decision. Employers should obtain a description of their classification from their insurance agent and familiarize themselves with the code they are assigned. An employer who feels there are significant differences in the description of their assigned classification code and their actual operations should notify their insurance agent. The agent can probably explain the discrepancies, but if not, the employer should contact the NCCI for answers. A company which changes operations substantially, for example, by purchasing new equipment, should always ask the agent or the NCCI to reevaluate their operations for possible reclassification. In most cases, the NCCI is the final authority on classification issues, but employers with special or complex problems can appeal their cases to the Workers' Compensation Classifications and Determinations Review Board. This board is within the Missouri Department of Insurance and reviews complicated cases involving classification, experience modification and other workers' compensation insurance problems.

Index
Calculating the Experience Modifier
What Determines Manual Rates?
Requesting Safety Assistance