How Workers' Compensation Premiums Are Determined

Premium Calculation Basics

Workers' compensation premiums are calculated by multiplying the insured payroll by a rate factor that reflects the business's risk profile. The rate factor, expressed in dollars per $100 of payroll, is set by the state insurance department and adjusted annually.

Key Determinants

Three primary inputs shape the rate factor and the final premium: industry classification, historical loss experience, and the employer's loss adjustment expense (LAE).

Industry Classification

Companies are assigned a Class Code based on the nature of their work. High‑risk occupations—such as construction, manufacturing, or mining—receive higher rate factors than low‑risk sectors like administrative services.

Historical Loss Experience

Insurers review the employer's past claim history over the past 3–5 years. Frequent or costly claims raise the rate factor, while a clean record can lower it.

Loss Adjustment Expense (LAE)

LAE covers the costs of handling claims—legal fees, medical bill reviews, and administrative overhead. Higher LAE percentages lead to higher premiums.

Additional Influences

Other elements can shift rates, such as the company's safety program, employee training, and claims management practices. States may also impose surcharge or credit adjustments based on safety certifications.

State‑Specific Rules

Each state publishes a rate schedule and may allow employers to request a rate audit. If the insurer's calculated rate exceeds the state‑approved rate, the employer can appeal for a lower rate.

Calculating Your Premium

To estimate a premium, multiply the annual payroll by the applicable rate factor and add the LAE percentage. For example, a $500,000 payroll in a Class 2000 occupation with a rate factor of $5.50 and an LAE of 15% would cost: ($500,000 ÷ $100) × $5.50 = $27,500; +15% LAE = $31,125.