Business Insurance 101: How Workers Comp Premiums Are Calculated

Workers’ compensation premiums reflect the risk that an employer faces when they take on the responsibility of providing coverage to their employees. This risk is reflected in the employer’s premiums for workers’ compensation insurance.

Therefore, understanding how workers’ comp premiums are calculated is important for employers so they can make informed decisions about the type and amount of coverage they need for their employees.

The premium calculations methods vary from state to state, but typically involve certain factors that we shall explain below.

Let’s get started.

The Level of Risk Involved

The level of risk an employer faces is the most important factor in calculating premiums.

The frequency and severity of workplace injuries measure the risk level. Accidents occur for a variety of reasons, and the type of industry an employer is in will affect the likelihood of injuries occurring. The industry standard for premium rates is to correlate the premium amount with the frequency and severity of injuries that employees have in each industry.

Number of Employees

The number of employees that an employer has will affect the premium calculation.

Employers with a higher number of employees will face a higher workers’ comp premium than employers with a smaller number of employees. This is because employers with a larger number of employees will have a higher risk for workplace injuries than employers with a smaller number of employees.

The number of employees will affect the calculation of premium rates in two ways. First, the employer will have to pay a higher premium for each type of coverage because there are more employees. Second, the amount that each employer pays into the state fund will be based on the number of employees.

The Size of the Company

The size of the company and amount of wages that are paid to employees will affect workers’ comp premiums. Naturally, the more the wages paid to employees, the higher the workers’ comp premium will be. The reason the size of the company is calculated into the premium calculation is that the more an employer pays its workers, the more money it has to take care of them if they are injured while at work.

The Nature of Business

The nature of business is also taken into account when calculating premiums.

Employers who have a higher risk for workplace injuries, such as those who work with hazardous chemicals or in other industries with a high frequency of on-the-job injuries, will face higher premiums. The same is true for employers whose employees work in work environments that are considered more dangerous, such as in construction, mining, or farming.

In Conclusion

As you can see, the method for calculating workers comp premiums typically involves factors such as the type of industry, the number of employees, and the amount of wages paid. That said, employers should be aware of the different factors that affect the cost of their workers’ compensation insurance and how their premiums are calculated. Understanding how these calculations are made will help employers make more informed decisions when purchasing workers comp insurance, and ultimately save them money.

Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.