Premium Calculation for Worker's Comp

If your  company purchases workers’ compensation insurance, the premium is
calculated according to a certain format. This can vary from state to
state; however, there is a considerable degree of uniformity. A policy is
normally one year in duration.

The basic method of pricing workers’ compensation insurance begins with a rate
per $100 of payroll. There are different classifications which apply to different work
exposures, and each classification will carry its own rate per $100 of payroll
determined by the state’s rating bureau and company’s insurance carrier.

Basically, the rate corresponds to the exposure to injury of different categories of
work. For example, the rate for a bank employee is subject to a lower workplace
risk of injury compared to a roofing contractor. Thus, the rate for the bank
employee’s classification code will be much lower than the rate for the roofing
contractor’s classification code.

Most states utilize the National Council on Compensation Insurance (NCCI) classification
system, but several states like PA, NJ, DE, CA and MI are slightly modified.

The leading classification principle in workers’ compensation insurance is that the
overall business is classified, not the individual workplace exposure of the
employee. As an example, in most states, at an automobile dealership the parts
counter employees are placed in the same classification as the mechanics. The
classification applied to the business is the “governing classification.” The
governing classification is the classification that generates the most payroll for a
company. There are exceptions, for example, construction companies are not subject
to the governing classification rules, but rather the individual exposure of the
employee is classified according to the classification rules that apply in a particular state.

Keep in mind that there are several workplace exposures that are normally separated into
their own classifications called “standard exceptions.” These include clerical, outside
sales and often drivers (but not in every state).

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