Instructor: Ian Lord

Ian is a real estate investor, MBA, former health professions educator, and Air Force veteran.

In this lesson, we will review how workers' compensation premiums are calculated, as well as what employers can do to reduce the cost of maintaining the insurance policy.

Steve owns a local trucking company with over 20 drivers plus an additional 10 support staff at the business headquarters. As an employer, Steve is obligated to buy workers' compensation insurance that covers the cost of treatment and lost wages following an on-the-job injury. Like other forms of insurance, Steve must pay regular annual premiums in the form of a payment for policy coverage. Let's help Steve understand how these premiums are calculated and what things he can do to control the cost of workers' compensation insurance.

## Calculation

Workers' compensation premiums are based on three factors:

• Payroll
• Employee job classification
• Company claims experience

Payroll refers to how much an employee gets paid each year. The total amount is then divided by \$100. The employee job classification describes what kind of work an employee performs and assigns a cost per \$100 of payroll based on the risk of an injury happening. The rate depends on what that career field typically experiences in loss and expense costs. In Steve's case, his drivers are in a higher risk category than the business support staff since the drivers work on the road and with heavy machinery while the rest of the company is made up of office workers.

The company claims experience is a multiplier based on the business employees' safety record or risk experience as a whole compared to similar employees at other companies. It is also known in the industry as an experience modifier or MOD. The average figure used is 1.00. A company with fewer and less severe accidents will have a MOD of less than 1.00, and a company with a higher accident rate will have a MOD greater than 1.00.

The total premium is calculated using the formula Payroll (per \$100) X Classification X Experience

Let's say that Steve's drivers earn \$1,000,000 a year. Divide that by \$100 and we get 10,000. In Steve's state, the employee job classification for drivers has a rate of \$0.20 per \$100 of payroll. The company has an average claims experience rating of 1.00. Plug that into the formula and we get the insurance premium for Steve's drivers as:

10,000 X 0.20 X 1

2000 X 1

\$2000

So Steve's drivers cost him a total of \$2,000 a year in workers' compensation insurance. He could then apply the formula using the figures for his office workers to determine the premiums for that set of employees. Add all the premiums up and he's got the total annual insurance cost.

## Employer Actions

What Steve really wants to know now is how he can get that cost down. First, he has to realize that some things are out of his control. He can't say that his drivers are really office workers and deserve a cheaper rate. The employee classifications are typically based on figures from the National Council on Compensation Insurance and are out of Steve or the insurance company's control. What he can do is make sure his employees are appropriately classified and work on maintaining a strong safety program to lower the experience modifier.

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