Worker’s compensation insurance benefits employees who suffer job-related injuries or illnesses, But how much does it cost?
Worker’s comp covers medical expenses, lost wages, rehabilitation costs, and more. Employers are required by law to have worker’s comp in most states.
The cost of worker’s compensation insurance varies widely based on factors like your industry, location, payroll size, claims history, etc.
Premiums are calculated per $100 of payroll. Rates range from less than $1 per $100 of payroll to over $15 per $100. On average, rates are $2 to $3 per $100 payroll.
In this article, we’ll discuss the key factors influencing the cost of worker’s compensation insurance and provide average rates by industry and state.
We’ll also outline strategies for reducing your premiums. With some effort, you can lower your rates significantly.
How Much Does It Cost To Get Worker’s Compensation Insurance?
Several significant factors determine how much it cost to get worker’s compensation insurance.
These include:
1. Industry Class Codes
The National Council on Compensation Insurance (NCCI) assigns class codes to various industries based on the type of work performed and the risks involved.
There are over 600 class codes. Higher-risk industries are assigned higher rates.
Some of the most expensive class codes include:
- Roofing
- Logging
- Steel manufacturing
- Mining
- Aircraft manufacturing
Office-based businesses tend to have the lowest worker’s comp rates. Here are some industry-class codes with lower risks and premiums:
- Accounting
- Real estate
- Nursing home
- Clothing retail
- Elementary school
As you can see, premiums can vary dramatically based on your industry.
2. Payroll Size
The amount of payroll your business has directly impacts your premium. Worker’s comp is calculated per $100 of payroll. The more employees you have and the higher their wages are, the higher your premium will be.
For example, a primary manufacturing company with ten employees earning $40,000 yearly would have a payroll of $400,000.
At a worker’s comp rate of $3 per $100 of payroll, their estimated annual premium would be $12,000.
A more prominent manufacturer with 50 employees earning $60,000 per year would have a payroll of $3 million. At the same $3 rate, their estimated annual premium is $90,000 – over 7 times more than the smaller company.
As your business grows, it’s crucial to account for the impact more employees and payroll will have on your worker’s comp costs.
3. Your Claims History
The number and severity of your business’s claims is a major rating factor. Insurance companies view frequent claims and costly claims as predictors of future risk.
The more claims you’ve had, the higher your premiums will typically be.
An experience modification factor compares your actual claims to average claims for your industry class code.
If your claims history is better than average, this modifier will be less than 1.0, resulting in a credit that reduces your premium.
If your claims history is worse than average, the modifier will exceed 1.0, resulting in a surcharge that increases your premium.
For example, a modifier of .85 would result in a 15% credit. But a 1.15 modifier would trigger a 15% surcharge. So controlling claims is crucial to lowering your worker’s comp costs.
4. State Requirements and Benefits
Worker’s compensation is regulated at the state level. Requirements and benefits can vary widely across different states.
States with more generous benefits and higher compensation tend to have higher worker’s comp rates.
For example, Alabama has an average worker’s comp rate of $2.43 per $100 of payroll.
But next door in Tennessee, the average rate is just $1.53 per $100 of payroll. The higher rates in Alabama are partly driven by state laws that require more generous benefits.
Understanding the worker’s comp requirements and benefit levels in your state can provide insight into premium rates.
Comparing your state to others can also help you assess the competitiveness of your costs.
5. Others
Other factors can influence the cost of getting your worker’s compensation, such as:
- Experience modifier – This compares your claims history to businesses like yours. Higher-than-average claims will raise your premium.
- Discounts – Factors like workplace safety programs and drug testing can reduce your costs.
While there are many factors out of your control, there are also strategies you can use to lower your worker’s comp costs proactively:
- Improve workplace safety – Implement procedures, training, and equipment to reduce injuries. This can significantly improve your claims history and lower premiums over time.
- Pay close attention to class codes – Make sure you are properly classified. If your class code seems too high for your risks, appeal to your insurer or state rating bureau.
- Raise your deductible – Opt for a higher deductible, like $10,000 per claim. This reduces your premiums but increases your upfront claims costs.
- Return to work program – Get injured staff back to work faster, even if in a limited capacity. Lower lost time means lower claim costs.
- Drug testing program – Require pre-employment and regular drug testing. Employees who fail cannot collect worker’s comp benefits.
- Buy Combo policies – Combine worker’s comp with other policies like business owners or general liability insurance to get a multi-policy discount.
- Compare rates annually – Shop your policy to ensure you get the most competitive rate.
Taking proactive steps to control your risks and claims while shopping around for the best rate can add substantial savings on your worker’s comp premiums.
Average Rates by Industry
To give you a better sense of typical worker’s comp costs by industry, here are 2023 average rates across the country for selected industries:
- Accounting – $0.28 per $100 of payroll
- Automotive industry – $2.65 per $100 of payroll
- Construction – $3.65 per $100 of payroll
- Education – $0.68 per $100 of payroll
- Healthcare – $1.34 per $100 of payroll
- Hotels – $1.62 per $100 of payroll
- Manufacturing – $2.71 per $100 of payroll
- Office workers – $0.31 per $100 of payroll
- Police protection – $7.71 per $100 of payroll
- Restaurants – $2.22 per $100 of payroll
- Retail – $0.80 per $100 of payroll
- Roofing – $17.82 per $100 of payroll
- Trucking – $5.81 per $100 of payroll
These rates can vary based on your specific class code and the state you operate in. But it gives you an idea of how premiums differ across major industries.
Higher risk businesses like roofing pay significantly more than office-based businesses.
Average Rates by State
In addition to industry, the state you operate in significantly impacts your worker’s comp costs.
Here are the average rates for 2023 across all class codes for the lowest 10 states and highest 10 states:
10 Lowest Rates by State:
- Indiana – $0.99 per $100 of payroll
- Arkansas – $1.19 per $100 of payroll
- Oklahoma – $1.20 per $100 of payroll
- Virginia – $1.25 per $100 of payroll
- Tennessee – $1.28 per $100 of payroll
- North Dakota – $1.29 per $100 of payroll
- Mississippi – $1.35 per $100 of payroll
- Texas – $1.41 per $100 of payroll
- Alabama – $1.43 per $100 of payroll
- South Carolina – $1.46 per $100 of payroll
10 Highest Rates by State:
- California – $4.02 per $100 of payroll
- Connecticut – $3.29 per $100 of payroll
- Alaska – $2.80 per $100 of payroll
- Illinois – $2.76 per $100 of payroll
- Maine – $2.74 per $100 of payroll
- New Hampshire – $2.70 per $100 of payroll
- Vermont – $2.64 per $100 of payroll
- Maryland – $2.62 per $100 of payroll
- New Jersey – $2.55 per $100 of payroll
- Montana – $2.54 per $100 of payroll
As you can see, rates in the lowest states are around 60-70% less than the highest states on average.
Even within the same region, rates can vary considerably from one state to the next.
Understanding how your state compares can provide useful context for evaluating your worker’s comp costs.
Options for Purchasing Coverage
There are a few different ways you can purchase worker’s compensation insurance for your business:
- Through an insurance agent – An independent agent can shop rates with multiple insurers and help you compare options. This is the most popular way to buy coverage.
- Direct from an insurance company – You can contact insurers without an agent to get quotes and purchase a policy.
- Through your state – Some states have a state-run worker’s compensation insurance fund as an alternative option you can choose.
- As part of a PEO arrangement – Payroll processing companies will handle your worker’s comp policy as part of an overall service.
One benefit of using an independent agent is they can guide on reducing your risks to help you qualify for discounts that could lower your premium.
An experienced agent will also stay on top of changes to state laws that could impact your costs.
Should You Buy From Your Current Insurer?
Many businesses automatically renew their worker’s compensation policy with their current insurance provider every year. But is this the best strategy to get optimal rates?
In most cases, the answer is no. Insurance companies will typically increase your premiums at renewal time year after year.
This process is known as “price optimization”. Even if you’ve had no claims, your rates are likely to inch up over time slowly.
That’s why it’s smart to shop your policy around periodically to stay on top of the market.
Getting quotes from several competitors ensures you get the best rates for your risk profile. Rates can fluctuate and differ from one insurer to the next.
Your current insurer may be motivated to lower your premium to keep your business when they know you compare rates. This shopping process gives you negotiating power.
Independent agents make this process turnkey by quickly gathering rate comparisons from multiple insurers.
In most cases, they can find opportunities to reduce your current premium. Shopping around is worth the effort.
Understanding Your Experience Modification Rate
A key number that will give you insight into your worker’s compensation premium is your experience modification rate, also called your “mod factor.”
This is assigned to your business by your state rating bureau based on your claims history.
The mod factor compares your actual claims to what would be expected for your business.
A rate of 1.0 means your claims history aligns with the industry average. Higher than 1.0 is worse than average, while lower than 1.0 is better.
Your mod factor then gets applied to your premium as a surcharge or a credit. For example:
- 0.90 mod factor = 10% credit
- 1.0 mod factor = no impact
- 1.10 mod factor = 10% surcharge
So getting your mod lowered can significantly reduce your premium. Steps like improving workplace safety and getting injured workers back quickly help lower your experience rating over time.
When shopping rates, ensure each insurer uses your current mod factor. Otherwise, it will be difficult to compare quotes accurately.
Understanding and controlling your mod is crucial in lowering premiums.
Deductible Options
Just like other insurance policies, worker’s compensation offers various deductible levels you can choose from to reduce your premiums:
- $500 deductible – Lowest premium option, but you pay the first $500 of any claim.
- $1,000 deductible – Slight premium reduction, but you pay first $1,000.
- $2,500 deductible – More savings, but you pay the first $2,500.
- $5,000 deductible – Even lower premium, but you pay first $5,000.
- $10,000 deductible – Highest premium reduction but you pay first $10,000.
The tradeoff is higher upfront claims costs for you versus lower premiums. Make sure you factor in cash flow requirements when choosing a deductible.
You’ll have to fund the deductible for each claim out of pocket until it’s met.
Higher deductibles of $10,000 or more are best reserved for large employers.
But a $2,500 or $5,000 deductible is a sweet spot that can create excellent premium savings for many small to mid-size businesses. Just have funds available to pay the deductible when needed.
Conclusion
The cost of worker’s compensation insurance can vary substantially based on your industry, state, claims history, and other factors.
But understanding what drives your rates puts you in a better position to control premiums.
Shopping your policy around, improving workplace safety, managing your claims experience, and choosing optimal deductibles are key steps to lowering your premiums.
With some dedicated effort, you can reduce your worker’s comp costs significantly.
