13.3 Premium Basis, Experience Modification, and Classification

Premium Basis: Remuneration per $100 of Payroll

Workers compensation premium is built on payroll, not on property value or limits. The basic formula the exam tests:

Premium = (Payroll / 100) x Rate

Payroll here is called remuneration and includes wages, salaries, commissions, bonuses, and the value of certain in-kind pay. The rate is stated per $100 of payroll for each classification code.

Worked example: A clerical class (code 8810) carries a rate of $0.30 per $100 of payroll. With $400,000 of clerical payroll: ($400,000 / 100) x $0.30 = 4,000 x $0.30 = $1,200 manual premium for that class.

Classification Codes

NCCI assigns each job a classification code that reflects its hazard. Office work is cheap; roofing is expensive. The premium is computed class by class, then summed.

An employer with mixed operations pays a blended bill. Misclassifying a roofer as clerical to cut premium is premium fraud and a major exam ethics trigger.

Experience Modification Factor (Mod)

Larger employers earn an experience modification factor (the mod) that compares their actual losses to the losses expected for their class. The mod multiplies manual premium:

Modified Premium = Manual Premium x Experience Mod

Worked example: Manual premium is $50,000 and the mod is 0.85 (a credit). Modified premium = $50,000 x 0.85 = $42,500, a $7,500 saving. A mod of 1.20 would raise it to $60,000. The mod rewards safety and is the strongest financial incentive for loss control.

Audits, Deposit Premium, and Dividend Plans

Because final payroll is unknown at inception, the policy starts with an estimated/deposit premium and is audited at expiration. If actual payroll exceeded the estimate, the employer owes more; if less, a refund is due.

Key premium concepts:

• Premium audit — physical or mail review of payroll records after the term.
• Retrospective rating — final premium adjusts to actual losses within a min/max band; large employers only.
• Dividend (participating) plans — return premium for good experience; cannot be guaranteed in advance.
• Schedule rating — credits/debits for specific risk features (safety program, housekeeping).

Trap: A promised dividend that is contractually guaranteed is improper, because dividends must be declared by the insurer's board, not promised.

Assigned Risk Plans and the Residual Market

Because coverage is mandatory, every state guarantees a way for hard-to-place employers to buy it. The assigned risk plan (residual market) is the insurer of last resort: an employer rejected by the voluntary market is assigned to a carrier required to write the policy, usually at a higher rate.

NCCI administers the residual market in many states. Key points the exam tests:

• An employer cannot be left uninsured simply because it is high-hazard or has poor losses.
• Residual-market premiums run above voluntary-market rates and carry surcharges for very poor experience.
• Improving the experience mod through loss control is the main path back to the cheaper voluntary market.

Worked example: A roofer (code 5551) with a 1.40 debit mod is declined voluntarily and assigned. On $200,000 payroll at an $18.00 rate, manual premium is ($200,000/100) x $18.00 = $36,000; the 1.40 mod makes it $50,400 before residual surcharges.

Reading the Experience Modification Factor

The experience modification factor (EMR or Mod) compares an employer's actual losses to the expected losses for its class. A Mod of 1.00 is average; below 1.00 earns a credit (lower premium); above 1.00 is a debit (higher premium).

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

Worked example: payroll $2,000,000 in a class with a manual rate of $3.00 per $100 and a Mod of 0.90. Base = ($2,000,000 / 100) x $3.00 = $60,000; apply the Mod: $60,000 x 0.90 = $54,000 premium.

A key exam nuance: frequency of losses hurts the Mod more than severity, because the rating formula weights primary (first-dollar) losses heavily. This is why one large claim may move the Mod less than several small ones, and why loss-control programs target frequency first.

The Audit Cycle and the Residual Market

Workers comp premium is an estimate at inception and trued up at year-end based on actual payroll.

Exam Trap: Overtime pay is included at the straight-time rate only (the premium portion of overtime is excluded), and executive officer payroll is counted between a state minimum and maximum - not at the full salary - so a high-paid officer adds only the capped figure to the premium base.