13.3 Premium Basis, Experience Modification, and Classification

Premium Basis: Payroll per $100

Workers compensation premium is built on remuneration (payroll), not on sales or property values. The rating unit is per $100 of payroll.

The basic formula is:

Premium = (Payroll / 100) x Rate x Experience Mod

Payroll for premium includes wages, salaries, commissions, bonuses, and most overtime (usually at straight-time value). Certain items are excluded, and an employee's payroll above a state cap for executive officers is limited.

Classification Codes

NCCI (or an independent state rating bureau) assigns each type of work a classification code reflecting its hazard. Higher-hazard work carries a higher rate per $100.

Most employers have a governing classification for the main business plus standard exceptions such as clerical and outside sales. Exam trap: payroll must be classified by job duty, not lumped into one code; misclassification is a common audit dispute.

The Experience Modification Factor

The experience modification factor (experience mod, or "mod") adjusts premium based on the employer's own loss history versus the expected losses for similar businesses in its class.

• Mod = 1.00: the employer's losses are exactly average; no adjustment.
• Mod > 1.00 (a debit): losses are worse than average; premium increases.
• Mod < 1.00 (a credit): losses are better than average; premium decreases.

The mod typically uses three prior policy years (excluding the most recent), and frequency of claims affects the mod more than a single severe loss, because the formula weights expected primary losses heavily.

Worked Premium Example

A carpentry contractor has $400,000 of payroll, a class rate of $8.00 per $100, and an experience mod of 1.20 (a debit for poor loss history).

1. Payroll units: $400,000 / 100 = 4,000.
2. Manual premium: 4,000 x $8.00 = $32,000.
3. Modified premium: $32,000 x 1.20 = $38,400.

If the contractor improved safety and earned a 0.85 mod next year, modified premium would fall to $32,000 x 0.85 = $27,200 — a strong argument producers use to sell loss control.

Audit and Estimated Premium

The policy is auditable. At inception the insurer charges an estimated (deposit) premium based on projected payroll. After the term, a premium audit measures actual payroll and adjusts the bill up or down. Employers who underestimated payroll owe additional premium; those who overestimated receive a return premium. Cooperation with the audit is a policy condition.

Premium Discount and Minimum Premium

Large accounts receive a premium discount because insurer expenses do not rise proportionally with premium size — the discount grows in tiers as premium increases. This is separate from the experience mod and applies after it.

Every policy also carries a minimum premium, the least the insurer will accept to issue coverage regardless of how small the payroll is. A tiny clerical-only firm whose calculated premium is $90 may still owe a minimum premium of, say, $500. Exam trap: the experience mod and premium discount are different mechanisms; the mod reflects loss history, the discount reflects size/economy of scale.

Remuneration Inclusions and Exclusions

Knowing what counts as payroll affects the audit:

For executive officers, payroll is capped between a state minimum and maximum so that an officer's actual high salary does not distort the premium base.

Reading an experience-mod question

The experience modification factor compares an employer's actual losses to the expected losses for its class. A mod of 1.25 is a 25% debit (premium up); 0.80 is a 20% credit (premium down). The formula weights frequency of small claims more heavily than a single large loss, because frequency predicts future losses better. This is why a contractor with many small injuries can have a worse mod than one with a single catastrophic claim - a counterintuitive point examiners like to test.

Sequence of premium calculation

Apply the steps in the right order or the answer is wrong: (1) divide payroll by 100 to get exposure units; (2) multiply by the manual rate for the governing class to get manual premium; (3) apply the experience mod; (4) apply any schedule rating credits/debits and premium discount for size; (5) compare to the minimum premium. The mod and the premium discount are different levers - the mod reflects loss history, the discount reflects economy of scale on a larger account. Confusing the two is a classic distractor.

Audit disputes and misclassification

Because the policy is auditable, the final premium depends on actual payroll measured after the term. Two recurring audit fights appear on the exam: misclassification (an employer codes carpenters as clerical to cut premium) and overtime (only the straight-time portion of overtime counts as payroll; the premium portion of overtime is excluded). A worked check: $400,000 payroll at an $8.00 carpentry rate is $32,000 manual premium; the same payroll wrongly coded clerical at $0.15 would be $600 - a $31,400 gap that an audit will catch and back-charge. That illustrates why honest classification matters.