Today we’re going to talk about how is workers’ comp premiums calculated for employers in USA?
If you’re a business owner or about to become a business owner as a startup, you may be wondering how are workers compensation premiums calculated?
In this article, I’m going to give you some of the basics around workers compensation and speak specifically about New York state, although most of the rules and comments I have here are going to be applicable USA countrywide.
In New York and most all other states in USA workers comp is required when you have employees.
There are exceptions to that rule, but if you have employees other than company owners you need workers comp in New York.
So, first question
What is Workers Compensation Insurance?
Workers compensation or workers comp is purchased by employers to protect a company’s workers from on-the-job injuries.
The purpose of workers comp is to pay all of the medical bills, rehab costs, prescriptions, and hospital charges incurred when a worker suffers a work related injury or illness.
Workers comp will also pay for a portion of the lost wages an injured worker may suffer due to their injury or illness requiring time away from the job to recover or rehabilitate.
For most small and medium-sized employers the workers compensation policy they will purchase is known as a guaranteed cost policy which is a bit of a misnomer.
What guaranteed cost means is that the rates are fixed in the policy at the beginning of the policy term but the cost can go up if the payroll goes up.
In most cases the employer does not assume or share in any of the risk in the policy other than in some cases a small deductible.
The other form of workers compensation that larger employers may consider who pay more than 200 000 a year in premium is a large deductible plan.
For these larger employers who want to reduce their upfront costs and are willing to assume some risk a large deductible plan may make sense to look at but again this is for larger employers with guaranteed cost premiums of 200 dollars or more and a good track record when it comes to workers comp claims how are workers
*Also Read: What Are The Benefits Of Workers Compensation
How is Workers’ Comp Premium Calculated in New York?
The fundamental starting point in workers’ comp premium calculations starts with identifying the proper class codes to be used in your policy.
Once you have the class codes you’ll be able to then find the proper rates for those codes in the workers comp manual.
In New York, those rates are known as loss costs and are the base rates to start with, from there the loss costs are multiplied by your insurance company’s specific loss cost multiplier and this is where it gets a little tricky.
Some large insurance companies may have up to eight or ten or more loss cost multipliers filed with New York state, those lost cost multipliers can range from 1.025 to 1.575 and an insurance company will apply different loss cost multipliers to reflect the risks of the insurer’s particular circumstances such as how risky the business is and their specific loss history and more.
The point is you’re not going to know what LCM or loss cost multiplier any insurance loss cost multiplier any insurance company is going to use so this is going to throw a wrench into trying to calculate your own workers comp premium.
So, the next step is to multiply the base rate or loss cost times the loss cost multiplier times the payroll for each class code established in step one.
The biggest rating factor is your experience rating modifier which is often called an ERM your x-mod, the mod, or the modifier.
Whatever it’s called this rating modifier is specifically developed for each employer in New York by the New York workers compensation insurance rating board, that modifier is based on three of the last four years of payroll and claims which is then run through a complex formula to arrive at a number which can be expressed as a debit or a credit.
Employers who perform better in that formula than the average or the expected rate earn a credit modifier and employers with experience which is worse than they expected earn a debit modifier.
Since that factor is a multiplier in the policy you’ll want to take every effort to have a safe work environment and reduce the number of claims you have.
There is a premium threshold of five thousand dollars to be eligible for the experience rating modifier.
Lastly, there are other rating factors applied to the premium development which will include premium discounts, scheduled credits, or debits expense, constant, terrorism, and catastrophe charges and in some states they’ll charge taxes and other fees.
Now let’s move on to workers compensation class codes.
*Also Read: Workers Comp Ghost Policy
Workers Compensation Class Codes
The classification codes used in your policy are determined by the overall function or occupation of your business not necessarily the function of each employee.
In many work environments you will see workers comp policies have multiple class codes.
For example, a food manufacturer in New York uses class a class code of 6504 which all the payroll for the workers doing food manufacturing will be placed in, but office workers in that same manufacturing plant would be placed in either clerical office workers which is code 8810 or executive officers of 8809.
Clerical and executive of course carry a much lower rate than food manufacturing due to the nature of the risk they are exposed to.
The codes to be used in your policy are first established by your insurance broker and your insurance company which can leave the door open to misclassifications and potential overcharges down the road, but you just can’t change class codes without the approval of com port in New York and the same is true in many other states of USA.
*Also Read: Questions To Ask Workers Comp Lawyer
How to Buy Workers Compensation?
The best way to purchase or buy workers compensation insurance there are a lot of moving parts to workers comp you can try to do this on your own or go to direct to an insurer that sells directly online to customers but I don’t really recommend that for two reasons:
- Going direct may cut out the middlemen so to speak and you may reap some savings there but it also puts you in the middle of finding the best deal and what may seem like the best deal today may not really be the best deal down the road, if you make wrong assumptions or tell the direct insurance company the wrong things at the beginning of your policy
- Buying any type of business insurance including workers comp is more than just buying a policy and sticking it in a drawer there are issues like handling claims, asking questions, getting advice getting risk control services, figuring out if your experience mod is correct or not, and many other issues relative to workers comp.
If you do it yourself and buy online directly are you getting these advocacy services, are you really doing it correctly, is this really the lowest cost over the long term that’s something to consider.
VIDEO: How is Workers’ Comp Premium Calculated in New York?
To wrap it up, workers comp can be complicated and costly this is why I think you need an expert advocate and why buying directly online really doesn’t make a lot of sense.
Will using an expert broker cost you more maybe maybe not, but an expert broker adds value to the purchase and can help you reduce the cost over the long term and help your business run smoother and more efficiently, that same broker can canvas the marketplace for you and find saving opportunities that may not otherwise be available to you for you to find.
Here’s the bottom line you can go it alone or you can use an expert, the same is true for other professionals you likely engage in your business you can do your own taxes or you can hire a CPA, you can go online and research your own legal agreements and contracts or you can hire an attorney.
My feeling is that regardless of the size of your company you should have an expert by your side and that includes your business insurance and your workers compensation insurance.
I hope now you have a clear idea about how is workers’ comp premium calculated in New York, USA.