Demystifying Workers' Compensation Insurance Premiums and How a PEO Can Lower Your Rates
By Chris PetersonFirst published Updated
The short answer
A workers' comp premium is roughly the class code rate times payroll (per $100) times your experience mod. A PEO can lower that by covering you under its larger pooled program, checking and correcting your mod and claims, and billing with each payroll; the result depends on your job classes, payroll and claims history.
Workers' comp premiums can be a big share of staffing costs for small and mid-sized businesses, especially where injury risk is higher. The formula looks simple. The details behind each part are where many businesses overpay, and where an experienced PEO can help.
How is a workers' comp premium calculated?
Premium = class code rate x (payroll / $100) x experience mod
Class code rate
Class codes are categories of jobs, defined in most states by the National Council on Compensation Insurance (NCCI). Rates vary by state and business type and are higher for more hazardous jobs and industries.
Payroll
Each employee's class code rate is applied to every $100 of their pay. Employees in riskier classes with higher pay produce much higher premiums.
Experience mod
The experience modification rate, or mod, compares your company's claims history with what's expected for a company of your size and class. 1.00 is average; below 1.00 is better. More claims than average push your mod, and your premium, up.
How can a PEO lower your workers' comp rate?
- Pooled coverage. On a master policy, the PEO is the policyholder and your employees are covered under its pooled experience, so one claim moves your cost far less than it would move a small standalone policy. Some PEOs instead give each client its own policy that keeps the client's mod; ask which model you'd be on.
- Mod and claims verification. PEOs review your claims and mod and correct errors that would push your rates up.
- Scale and billing. PEOs buy coverage from large insurers for many employers at once, and usually bill premiums with each payroll, so you aren't hit with a large bill at the end of the year.
With a PEO, you don't have to hunt for rates or track every state rule yourself. What it saves you depends on your classes, payroll and claims, which is why it's worth comparing PEOs side by side.