13.3 Premium Basis, Experience Modification, and Classification

How Premium Is Built

Workers' comp is rated on payroll (remuneration), not on the number of employees. The base formula is:

Manual Premium = (Payroll / 100) × Rate

The rate is stated per $100 of payroll for each job classification. Total premium then flows through a chain of adjustments:

Premium = [(Payroll ÷ 100) × Rate] × Experience Mod × Schedule Mod × Discounts + Expense Constant

Payroll is an estimated, auditable exposure base. The policy is issued on an estimate, and at the end of the term the insurer conducts a premium audit of actual payroll, generating an additional or return premium.

Payroll Inclusions and Caps

Not all dollars count, and executive payroll is capped:

Executive officers and partners are included subject to a statutory minimum and maximum weekly payroll, so a CEO earning $1,000,000 is counted only up to the state's officer maximum (e.g., capped near $2,600/week), not full salary.

Classification Codes

NCCI assigns every type of work a four-digit classification code, each with its own manual rate reflecting that job's hazard. A clerical office worker (Code 8810) is far cheaper than a roofer (Code 5551).

• A business is rated on the governing classification (the basic code with the largest payroll, excluding standard exceptions like clerical 8810, outside sales 8742, and drivers 7380).
• Standard exception codes are split out and rated separately because they apply across many industries.

Exam trap: Payroll, not headcount, is the exposure base. Two firms with the same number of workers pay very different premiums if their payroll and class codes differ.

The loss costs that underlie each class rate are developed by NCCI (or an independent state rating bureau such as California's WCIRB, New York's NYCIRB, or Pennsylvania's PCRB) from pooled statewide data, then loaded by each insurer for its own expenses and profit. A handful of states (the monopolistic states covered in 13.4) are not NCCI states at all and use their own fund's rates. When a single insured performs work that does not fit any listed class, the bureau assigns the most analogous code rather than inventing a new one, and misclassification discovered at audit is corrected retroactively to inception.

Worked Example: Manual Premium by Class

A contractor has two payroll buckets:

• Roofing: ($400,000 ÷ 100) × $18.00 = $72,000.
• Clerical: ($100,000 ÷ 100) × $0.30 = $300.
• Total manual premium = $72,300 (before experience mod and other adjustments).

The Experience Modification Factor

The experience modification factor (the "mod" or EMR) compares an employer's actual losses to the expected losses for businesses of its size and class. It is the single biggest lever an employer controls.

Mod = Actual Losses ÷ Expected Losses (simplified)

A mod of 0.85 cuts premium 15%; a mod of 1.20 adds 20%. Claim frequency (many small claims) drives the mod up more than severity (one big claim), because the formula discounts the excess portion of large losses to reward loss control over luck.

Worked Example: Applying the Mod

Using the $72,300 manual premium above, suppose the employer's experience mod is 0.90 (a 10% credit for good loss history):

• Modified premium = $72,300 × 0.90 = $65,070.
• If instead the mod were 1.25 (heavy claim frequency), premium = $72,300 × 1.25 = $90,375.
• The swing between the two mods is over $25,000 on identical payroll — illustrating why safety programs pay for themselves.

Premium Audit and Other Modifiers

After the experience mod, two more adjustments commonly appear:

• Premium discount — a volume credit that grows as premium size grows, reflecting fixed expenses spread over a larger premium.
• Schedule rating — debits or credits (often up to ±25%) the underwriter applies for risk features the class rate does not capture, such as superior machinery guarding or a poor housekeeping record.

At expiration, the premium audit trues up estimated payroll to actual. If the employer underestimated payroll, an additional premium is billed; if it overestimated, a return premium is owed. An expense constant (a flat dollar charge) is added to every policy to cover issuance costs.

Quick Answer: The order is manual premium → experience mod → schedule mod → premium discount → expense constant, then audited to actual payroll at year-end.