Workers’ compensation, also known as workers’ compensation insurance, is a type of insurance that covers your business against the losses of employees due to injury on the job.
Depending on where you work and what industry you work in, your company may be required to obtain workers’ compensation insurance. This is because many states require all businesses with at least one employee to have workers’ compensation coverage in case an employee gets injured on the job site.
That said, the cost of insuring against workplace risks is called a risk premium. In other words, the cost of insuring against the potential financial loss caused by risks like injury, occupational disease, and other perils of the job.
In this article, we’ll take a look at how workers’ comp premiums are calculated and how you can lower them in the future if it becomes necessary.
Risk-Based Risk Calculation
Unlike auto insurance, where factors like your driving history and vehicle make and model is considered, workers’ compensation is a unique type of insurance where the premium you pay is determined by the company’s risk profile.
Your company’s risk profile is the first thing your insurance company will look at when calculating workers comp premiums rates. This will be determined by various factors, such as how long your company has been in business and your employees’ work.
The Number of Employees
The number of employees in your company is one factor used to calculate your premium rates. As the number of employees in your company increases, so does the likelihood of a work-related accident. When you have a smaller company, an accident is less likely to happen, resulting in a lower cost.
Moreover, if you are operating a small business or are self-employed, you may not need workers’ compensation coverage as much as a larger company or organization. But if you have a large company, you’ll likely pay more for workers’ compensation.
The Company’s Track Record
Another factor your insurance company uses to determine your premium rates is your company’s track record to see if it has a history of making claims. If your company has made several claims in the past, your insurance company will consider you a high-risk company and will charge higher premium rates.
The Size and Location of the Company
The size of the company where you operate is another factor your insurance company considers when calculating your premium rates.
The company’s size has nothing to do with the likelihood of an accident happening. Instead, it concerns the number of premiums the company can safely charge. Smaller companies have fewer risks to cover, paying fewer premiums than larger companies.
Rates also change depending on the geographic location of the company. Rates are typically higher in urban centers and lower in rural areas due to the higher risk of a work-related accident in urban areas and the lower likelihood of an accident in rural areas.
Ultimately, the amount in workers comp premiums you are charged is based on how much your business is expected to lose if an employee gets injured at work. In other words, how much will your business have to pay in out-of-court settlements or reimbursement for medical expenses and lost wages due to that injury?
All things considered, the above criteria contribute to a fair assessment. And as a business owner, knowing this puts things into perspective, doesn’t it?