Whether due to state law or risk management, many companies must purchase workers’ compensation insurance. While business organizations frequently buy other types of insurance to mitigate risk, purchasing protection for employee injuries is significantly different. Workers’ compensation brokers work with business leaders to provide adequate coverage. Anticipating how much such protection will cost, however, can be difficult.
Insurers use a formula to determine how much you must pay for workers’ compensation protection. This formula has three parts:
- Audited Payroll
- Employee Classification
- Experience Modification
Audited Payroll and Employee Classification
To begin to determine how much a company will pay for coverage, workers’ compensation brokers begin with a business’s audited payroll. This is to determine how many employees will fall under the workers’ compensation protection. Then, brokers assign an employee classification to better understand the coverage a company needs. Essentially, they group employees by the type of work employees do.
After brokers determine how much a company might pay in premiums, they adjust the payment upward or downward by applying an experience modification. Essentially, this equalizer rewards companies that take steps to keep worksites safe. Those with poor safety records, by contrast, might expect to pay more.
Purchasing workers’ compensation insurance is a necessity for the overwhelming majority of employers in the United States. Understanding how brokers calculate rates is critical in keeping premiums reasonable.