Purchasing workers’ compensation insurance may be a necessary cost of doing business, but that doesn’t mean employers can’t price shop. Nearly half of respondents to a recent survey conducted by ADP affiliate, Automatic Data Processing Insurance Agency, Inc. (“ADPIA”)1 named price as the deciding factor when selecting a policy, followed by referrals from agents or advisors.
Making a decision based on cost, however, requires an understanding of how insurance carriers calculate workers’ comp rates. Several factors specific to the business, such as its industry and payroll figures, factor into the equation.
Employers can exert greater control over their workers’ comp costs by properly managing claims and integrating their workers’ comp premium payments with payroll. Some payroll system providers also offer premium pay-as-you-go solutions that may help improve cash flow.
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How much does workers' comp cost?
Workers’ comp insurance costs vary. Even businesses that are close in size and in similar industries may pay different premiums because of how the rates are calculated.
Insurers generally determine an employer’s worker’s comp rate based on:
- Classification of employees according to job duties
- Total payroll for each classification
- The state where coverage is issued
- The business’s industry
- Previous loss or claims experience
- Adjustments, e.g., credits for workplace safety programs
How are workers’ comp insurance premiums calculated?
Insurance carriers charge workers’ comp for every $100 of payroll. The actual calculation is as follows:
Carrier rate x Payroll (Per $100) = Premium
With traditional payment plans, the payroll figure is estimated at the start of coverage and then reconciled at year’s end during an audit. Pay-as-you-go plans use actual payroll figures and carrier rates for each class code throughout the year and, though still subject to audit, can help reduce the risk of a variance.
How do audits affect workers’ comp cost?
All workers’ comp policies require annual audits to help ensure that the employer pays the right amount for the coverage received. In most states, audits are required by law.
During an audit, the insurance carrier calculates the final workers’ compensation premium using actual payroll and class codes. They may request tax records, general ledgers, contracts and any other documents they deem necessary as part of this process.
If it’s determined that the premium paid was too low, employers may owe money. If the premium paid was too high, the carrier may refund the difference.
How to reduce workers' comp insurance costs
Although some aspects of workers’ comp costs, like industry or location, are beyond employers’ control, there are tools that can help reduce their premiums. Examples include:
- Premium payment programs
Pay-as-you-go solutions allow employers to pay their insurance premiums throughout the term of the policy using actual payroll figures. This payment structure can help improve cash flow and minimize significant deficits during year-end audits.
- Workplace safety programs
Employers can help limit workers’ comp claims by removing physical dangers from the workplace and preventing avoidable accidents and injuries as much as possible. Some carriers offer credits for implementing such safety measures.
Conducting a policy audit before the insurance company does can help employers find all the credits they be eligible for and any job classification errors that could affect their premium. Some go a step further and monitor, document and report employee changes throughout the policy term so they can be more confident they have accurate coverage.
- Loss control management
Employers may want to evaluate their risk-related losses and apply solutions, such as employee training or ergonomic applications, to control them.
Additional considerations for reducing liability risk and lowering costs
- Review estimated payrolls and worker classifications for accuracy
- Know the accident trends for the industry and work environment
- Insist that subcontractors carry their own workers’ comp policy (if required by law) and request a valid certificate of insurance.
Frequently asked questions about workers’ comp cost
What does workers' compensation insurance cover?
Under a workers’ comp policy, employees who are injured on the job or suffer a work-related illness may be entitled to the following:
- Medical treatment
- Disability benefits or partial income replacement
- Death and funeral service paid to eligible dependents
Who sets workers' comp rates?
Insurance carriers calculate an employer’s workers’ compensation premium based on the industry, state laws, payroll figures and claims history. In some cases, credits or adjustments may be available for safety programs.
How do you buy workers' compensation insurance?
Depending on their situation, employers may be able to purchase workers’ comp insurance through:
- Private insurance companies
- Competitive state funds (for high-risk employers)
- Assigned risk plans (for high-risk employers)
- State governments (for businesses in monopolistic states)
- Self-insurance (for larger businesses that meet collateral requirements)
This article is informational only and is intended to be used as a starting point in answering how much is workers’ comp insurance. It is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal, insurance, tax advice or other professional services.
1Automatic Data Processing Insurance Agency, Inc., (ADPIA®), an affiliate of ADP®, Inc.