The cost of workers' compensation is determined by rates that are set or approved by each individual state. Rates are typically based on the risks associated with the individual jobs, the frequency of on-the-job injuries and the severity of the injuries that occur. The process used by each state to set or approve rates is similar, although rates can vary considerably from state to state. Insurers can adjust their base rates on a number of factors, including the claims history of a specific employer.
Workers' comp insurance companies formulate premium costs – regulated at the state level – based on the risk associated with the job among other factors. In California, for example, low risk jobs such as clerical workers, have a risk factor calculated at 1.25 percent per $100 of the employee's salary, at the time of publication. Companies with employees in higher-risk jobs, such as roofers, can expect to pay more in workers' comp insurance. Insurers use a list of business occupation classifications sorted by these risk factors, the total number of employees and payroll to determine the policy's monthly base rates before applying any discounts.
Discounts and Reduced Fees
Individuals or businesses that purchase a workers' compensation policy can have discounts applied that can reduce the cost of the policy. Insurers offer discounts for such things as workplace safety programs and drug-free workplaces. Some workers' comp companies also offer deductible plans to employers. When an employer opts for a higher deductible, he increases his out-of-pocket costs, but decreases his monthly premiums. This kind of policy works best for employers that do not have a significant amount of workers' compensation claims or on-the-job injuries.
Small businesses that join insurance pools can cut down on insurance costs. Or they can choose to self-insure and self-administer their claims to further reduce their costs. These types of insurance requires companies to have licensed claims staff and the money to fund the program. In states that allow self-insurance, self-administration or third-party administration, the company must receive a state license to do so, annually report on medical only and liability claims and put up a bond or letter of credit equal to the outstanding projected costs of their existing claims. When they choose a third-party administrator, workers' comp claims are managed by an outside company that maintains the claim staff.
Workers' compensation insurance is required by law in all states but Texas. The number of employees a company has can affect that requirement. States also perform mandatory audits to ensure that a business has the appropriate amount of workers' compensation coverage. In cases of self-insurance, the state audits the future liability to ensure complete coverage for injured employees. Hefty fines are assessed by the state when the company does not have enough insurance, or money set aside for future claims when self-insured. Businesses need to supply an insurer or claims administrator with the correct information to calculate the appropriate premium that will be charged for workers' compensation coverage.
The yearly premiums that are paid by employers depend on the number of people that are currently employed by the business and job risk classifications. A small business owner may typically pay from $600 up to $2,000 a year with two or three employees in positions with low risk. Larger companies with 15 to 20 clerical workers can pay between $4,000 and $6,000 a year. But a roofing company, for example, with 10 employees who earn $12,000 a year can pay as much as $33,600 annually for workers' comp insurance based on a premium calculated up to 28 percent of gross salary, depending on the individual state.