How do insurance companies calculate workers compensation premiums?

Q:

How do insurance companies calculate workers compensation premiums?

A:

That's a great question. Whenever you reach out to a broker or agent about getting an insurance quote and they send a number your way, we all want to know just how the underwriters at the insurance company came up with it. Sometimes, it can seem so random, especially when you end up paying more than some of the people you know for the same kind of coverage.

Now, not many people have this kind of experience with workers compensation because it's often government-run and mandatory. Since it doesn't operate on a more open market, it can be hard to get exact information about what goes on behind the scenes. Still, there is some information out there about what factors into these calculations.

Workers compensation is a type of liability insurance bought by employers to cover employees for injuries sustained on the job. This is the coverage that pays for things like medical expenses and lost wages (see An Intro to Workers' Compensation to learn more). Here are some of the things insurers will look at when deciding what premiums to charge you company:

  1. Payroll. The size of your payroll plays a part because it is a proxy for how many employees you have and how valuable your employees are. The more employees you have, the higher the probability one of them will have to file a claim against you. The more valuable your employees are (in monetary terms), the more the insurer will have to pay out in disability payments for employees unable to work.
  2. Classification. The insurer will look at the kind of work your employees do and put your company in a rate group based on risk. The relationship here is pretty clear: an office worker is at lower risk of injury than a welder or a factory hand. The manufacturing company, therefore, will pay a higher premium for their workers compared to a software developer with a comparable payroll.
  3. Experience. The insurer will also likely look your company's claims history and compare it to other companies in your rate category. This "experience modifier" is a multiple that might be applied to your premium, which may increase or decrease your premiums paid (find out How Your Claims History Informs Your Insurance Future).

These are the three main things an insurer will look at when pricing a company's premiums. Hopefully, you will now have a better sense of the number your agent or broker quoted you.

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Written by Jacques Wong
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Jacques grew up around the insurance industry and began actively participating in 2013. Since then, he has gotten a Level 2 license, won an Insurance Council of BC award in 2015 for academic excellence in the insurance licensing courses and educates insurance professionals through PNC Learning.   Full Bio