Workers' compensation premiums depend on payroll, industry and claims. Learn what affects your rate and how to manage costs.

Workers’ compensation premiums may seem unpredictable, but they’re based on a clear formula that considers your payroll, industry classification, and claims history. As a business owner, understanding how your premium is calculated can help you manage costs and improve your safety performance.

The premium formula

Your base premium is calculated using the following formula:

(Payroll ÷ 100) × Classification rate × Experience modification factor = Premium

Before diving into the numbers, let’s look at the three key components that drive your premium.

Payroll

Payroll is the foundation of your premium calculation.
  • It includes total annual payroll for employees, divided by 100
  • Covers wages, salaries, bonuses and commissions
  • Excludes tips, severance and reimbursed expenses

The higher your payroll, the higher your base premium—but it’s only one part of the equation.

Classification rate

Each job type is assigned a classification code based on risk level. For example, an office worker has a lower risk than a livestock handler.

  • Rates are set by the National Council on Compensation Insurance (NCCI) or state-specific bureaus.
  • These codes determine two key values:
    • Expected Loss Rate (ELR): Estimates how much loss is expected per $100 of payroll for a specific job type. Higher-risk jobs have higher ELRs.
    • Discount Ratio (D-ratio): Determines how much of those expected losses are considered “primary”—which affects how frequent, smaller claims impact your mod factor.

Your classification rate reflects the inherent risk of the work your employees perform.

Experience modification factor (mod factor)

This is where your claims history comes into play and where you have the most control.

  • The mod factor compares your actual losses to expected losses for your industry.
  • A mod factor less than 1.0 means a better-than-average safety record (discount).
  • A mod factor greater than 1.0 means a worse-than-average record (surcharge).
  • It’s recalculated annually and influenced by:
    • Claim frequency and severity
    • Payroll size
    • Classification codes

Understanding what goes into your mod factor helps you take proactive steps to improve it.

Sample premium calculation

Let's say your business has:
  • Payroll: $500,00
  • Classification rate: 6.90
  • Mod factor: 1.05
Plugging these numbers into the premium formula gives you:

(500,000 ÷ 100) × 6.90 × 1.05 = $36,225

This is your estimated base premium before any additional adjustments or credits.

Experience rating: What’s behind the mod factor?

Experience rating adjusts your premium based on your actual claims history. It promotes fairness by rewarding safer employers and penalizing riskier ones.

Data used in mod factor calculation

  1. Frequency: How often claims occur
    • Claims are split into:
      • Primary losses (up to the split point)
      • Excess losses (above the split point)
  2. Severity: Size of claims beyond the split point, capped by state-specific limits
  3. Classification codes: Job types and risk levels
  4. Payroll: Used to calculate expected losses
  5. Medical vs. indemnity claims: Medical-only claims may be discounted by 70% in mod calculations

If you would like detailed information on how the mod is calculated, please see NCCI's ABC's of Experience Rating.

What you can control

While some factors are fixed, others are within your control.

Controllable:
  • Safety programs
  • Claims management
  • Return-to-work programs
Less controllable:
  • Payroll fluctuations
  • Classification codes

By focusing on controllable factors, you can improve your mod factor and reduce your premium over time.

Regulatory context

Most states use NCCI to calculate experience mods. However, North Dakota, Ohio, Washington, and Wyoming are monopolistic states and require coverage through state-run programs. The NCCI state map is a convenient reference of states where insurance departments have designated NCCI as the licensed rating and statistical organization and Plan Administrator.

Why it matters

Understanding your workers' compensation premium helps you:
  • Make informed decisions
  • Reduce costs
  • Improve workplace safety

The key to controlling your experience modification factor—and ultimately your workers' compensation premium—is accident prevention and cost control after an incident.

Preventing accidents starts with strong safety programs and consistent enforcement. Controlling costs involves:

  • Using designated physicians (where allowed by state law)
  • Developing a robust return-to-work program
  • Conducting effective accident investigations
  • Training employees and supervisors on safety responsibilities and enforcement

By actively managing these factors, you’re not just saving money – you’re investing in a safer, more productive workplace.

Nationwide’s "Every STEP counts" worker safety program provides a structured approach to building a strong safety culture. From hiring and training to incident response and post-event actions, our program helps you take a comprehensive approach to workplace safety.

References
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