Editor’s note: Insurance Questions answers questions about insurance coverage for equipment rental businesses. Email your insurance questions to firstname.lastname@example.org. Answers are provided by ARA Insurance, Kansas City, Mo. For more information, call 800-821-6580 or visit ARAinsure.com.
Q: How is my workers’ compensation premium calculated?
A. The equation is: Payroll x Rates x Experience modification factor = Workers’ compensation premium.
First, your payroll is divided by employment classification. Then, your rates are determined by:
- Your state’s rates for each employment classification.
- Your insurer’s rate level for your business. The amount of payroll in each class is multiplied by the rate for that class and the results are totaled.
Next, the total is multiplied by your company’s experience modification factor, which is based on your company’s claim history relative to claims made by others in your industry and state. If your claims history is less than the expected average, you receive a credit and thus, a lower premium. The opposite is true for those with claim histories greater than the expected average.
In addition, some states allow insurers to apply credits for good loss history, as well as for factors that are not reflected in your experience modification factor, such as employee training or a new safety program.
Finally, some insurers offer dividend programs. At the end of the policy period, if a company’s losses were less than predicted, the insurer will refund a portion of the premium.