The cost of workers' compensation is determined by rates that are set or approved by each individual state. Rates are typically set based on the frequency of injuries that occur on the job and the severity of the injuries that occur. The process used by each state to set or approve rates is similar, although rates can vary considerably from state to state. Insurers can adjust their base rates based on a number of factors, including the claims history of a specific employer.
- Typically, an insurer bases the premium rate are by using a specific cost for each $100 of an employee's salary plus and additional factors such a claims experience. Costs can also vary on the classification of work based on occupational risks that are posed by a business. Insurers typically have a list of business occupation classifications with factors such as the number of employees and payroll that are used to determine a base rate for a policy.
- Individuals or businesses that purchase a workers' compensation policy can have many discounts applied that can reduce the cost of the policy. Insurers offer many discounts including having a workplace safety program in place and having and having a deductible apply to the policy. When a higher deductible is used the price that is paid for the policy will decrease. Insurers may also include a discount for a drug-free workplace.
- States such as Michigan have a Workers' Compensation have developed a "Workers' Compensation Cost Estimator" that can be used to study the cost structure of the insurance. This includes helping a business to develop various strategies to reduce costs. However, the cost estimator is only a tool to that uses work force data to provide information about potential costs. An insurer within the state will still be needed to provide a quote for workers' compensation coverage.
- Businesses within each state that have a certain number of employees are required to have a workers' compensation policy. States also perform mandatory audits to make sure that a business has the appropriate amount of workers' compensation coverage. As a result, a business will need to supply an insurer will the correct information to calculate the appropriate price that will be charged for a workers' compensation insurance policy.
- The yearly premiums that are paid by employers depend on the number of people that are currently employed by the business. A small business owner may typically pay about $2,000 to $3,000 in premiums a year with two or three employees. Larger companies that have 15 to 20 employees may pay between $8000 and $12,000 a year. However, this largely depends on the rates in a particular state and an employee's classification rating.
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