13.3 Premium Basis, Experience Modification, and Classification

Premium Basis: Remuneration per $100 of Payroll

Workers' compensation premium is payroll-based. The exposure base is remuneration (payroll), and the rate is expressed per $100 of payroll for each governing classification.

Basic formula:

Premium = (Payroll / 100) x Rate

Because the final payroll is unknown when the policy is issued, the policy is written on an estimated payroll and is auditable. At expiration the carrier performs a premium audit and adjusts to actual payroll, generating an additional premium charge or a return premium. Overtime is generally counted at straight-time pay (the overtime premium portion is excluded), and certain payroll is capped for executive officers.

What counts as remuneration is tested: include gross wages, commissions, bonuses, holiday/vacation/sick pay, and the straight-time portion of overtime. Exclude the extra overtime premium, tips, severance, and most employer contributions to qualified benefit plans. Executive officers are included at a payroll subject to a state-set minimum and maximum payroll, so a high-paid owner is not charged premium on the full salary. Sole proprietors and partners are normally excluded unless they elect coverage.

Classification: The Governing Class

NCCI (or an independent state bureau such as California's WCIRB) assigns each business a classification code that reflects the operations and hazard of the work. Premium is computed on the governing classification plus any standard exception classes:

• Standard exception classes are job types found in almost every business and rated separately: clerical office (8810), outside sales (8742), and drivers (7380).
• All other payroll falls into the governing class that describes the principal business.
• Misclassifying high-hazard payroll into a low-rated class (e.g., calling roofers "clerical") is premium fraud and is corrected on audit.

The expense constant is a flat charge added to every policy to cover the fixed cost of issuing and servicing it, regardless of size. A minimum premium ensures even the smallest risk pays enough to be worth writing. After the experience mod, eligible employers receive a premium discount that increases with premium size (recognizing that fixed expenses are a smaller share of a large account), and qualifying employers may earn schedule rating credits/debits for risk characteristics the class rate does not capture.

Experience Rating: The Mod Factor

Larger employers are experience rated. The experience modification factor (mod or EMR) compares the employer's actual losses to the expected losses for businesses of the same class and size, then multiplies the manual premium up or down.

The mod rewards safety. Note the design quirk: frequency of small claims hurts the mod more than a single large claim, because the rating plan caps individual losses ("primary" vs "excess" loss split) to penalize patterns of accidents over one catastrophic event.

Worked Example: Manual Premium and the Mod

A contractor has $500,000 of payroll in a class rated $7.50 per $100, and an experience mod of 0.90.

1. Manual premium = ($500,000 / 100) x $7.50 = 5,000 x $7.50 = $37,500.
2. Modified premium = $37,500 x 0.90 = $33,750 (a $3,750 credit for good experience).

If the same contractor's mod were 1.20 instead, modified premium = $37,500 x 1.20 = $45,000 (a $7,500 debit). After the mod, schedule and premium discount credits and any expense constant are applied to reach the final premium. The mod always applies to the manual premium, before discretionary scheduling.

Premium Basis and Classification

Workers' compensation premium is built from three elements: classification, payroll, and rate. Each type of work is assigned a classification code (developed by NCCI or an independent state bureau) that reflects its hazard — clerical office work carries a far lower rate than roofing or logging. The rate is expressed per $100 of payroll, so premium = (payroll ÷ 100) × rate, summed across classifications.

Because actual payroll is not known until the period ends, the policy is auditable: a deposit premium is collected up front and an audit at year-end reconciles estimated to actual payroll, generating an additional or return premium. Overtime is generally counted at straight-time wages for premium purposes.

Experience Modification and Premium Discounts

Larger employers' premiums are adjusted by an experience modification factor (the "mod") that compares the employer's actual loss experience to the expected losses for its classification. A mod of 1.00 is average; below 1.00 (a credit mod) earns a discount for better-than-average safety; above 1.00 (a debit mod) surcharges worse-than-average experience. The formula weights frequency of claims more heavily than severity, so many small claims hurt the mod more than one large loss — a key safety-incentive point the exam tests.

Other premium adjustments include schedule rating (credits/debits for specific risk characteristics), premium discounts for size, retrospective rating (final premium tied to actual losses within a min/max range), dividend plans, and deductible programs. The recurring exam idea is that classification and payroll set the manual premium, and the experience mod and rating plans then reward or penalize the individual employer's loss record — aligning premium with both the type of work and the employer's safety performance.