“Most contractors have no idea how their premium is calculated — or how much their experience mod is costing them. Here’s exactly how the math works.”
Have you ever called several different agents, asking for a workers compensation rate quote, and tried to find someone willing to give you a straight answer regarding the cost of workers compensation insurance? It seems like you call one agent, and they give you a rate, call another agent, and they give you a completely different rate. It’s like they’re speaking two different languages.
Well, I’m here to tell you there’s a formula for workers compensation pricing, and once you grasp it, you’ll never look at your workers comp renewal in the same way again.
Workers Compensation Insurance Cost: The Basic Formula Starts With Payroll
The basic workers compensation pricing model is as follows:
The cost of workers compensation is based on a per $100 payroll cost. Each job classification has a rate, and this rate is multiplied by your total payroll in that classification.
The rate for most landscaping businesses, HVAC contractors, and plumbers will fall in the range of $2.00 – 3.00 per $100 payroll.
Let’s look at some real-life examples:
Landscaping Company
Total payroll: 500,000
Rate: 2.50 per 100
Base Premium: 12,500
HVAC Contractor
Total payroll: 750,000
Rate: 2.75 per 100
Base Premium: 20,625
Plumbing Company
Total payroll: 600,000
Rate: 2.25 per 100
Base Premium: 13,500
These are base premium examples. Your actual cost will be much higher or much lower, depending on one major factor.
How the Experience Mod Affects Workers Compensation Insurance Cost
The experience modification factor, also called the experience mod, is a figure that the insurance company multiplies your base premium by according to your actual claims history in comparison with other similar businesses in your industry.
Here’s how it works:
If you have a 1.00 mod, you are average, so you pay the base rate.
If you have an 0.85 mod, you are better than average, so you pay 15 percent less.
If you have a 1.25 mod, you are worse than average, so you pay 25 percent more.
Let’s go back to the landscaping company with a base premium of $12,500 and see how the experience mod impacts the final premium:
Experience Mod Final Premium
0.85 $10,625
1.00 $12,500
1.25 $15,625
1.50 $18,750
This is a difference of more than $8,000 for the same company with the same payroll. The only difference is claims history and how well it has been managed.
The great majority of business owners have no idea that they can audit this figure for its accuracy, nor can they improve it with the right strategy. They are paying more than they should because no one has ever sat down with them and explained it.
Does Your State Matter? Absolutely.
This is where it gets interesting, and here’s where a great many business owners are surprised.
Some states have mandated rates. In the state of Florida, for instance, the state mandates the workers’ compensation rate. Every insurance company has to charge the same base rate for the same class code in the state of Florida. In a state like this, your agent can’t shop for the base rate because it’s fixed. They can compete for you in terms of service, dividend potential, and how hard they will work your experience mod.
The other states are open competition states. North Carolina and South Carolina are examples of open competition states, where carriers can file their own rates. This means that the base rate can actually vary from one insurance company to another for the same class of business. In these states, an agent who knows how to market your account to the right carriers can find real pricing differences on top of any mod-related savings.
If you know what type of environment your state operates in, you’ll know a lot about where the leverage is in your program.
What This Means for Your Business
If you’re a landscaper, an HVAC contractor, or a plumber, your workers’ compensation premium is probably one of the largest line items in your insurance budget. And if your experience mod is sitting at 1.00 or above, there’s a real conversation worth having about what’s driving it and what can be done about it.
The businesses that pay the least for workers’ compensation aren’t accidents. They’re businesses that work with someone who understands the rating system, who’s monitoring their mod, and who’s actively managing their claims. It’s not complicated, but it does require an agent who actually knows what he’s doing.
If you’d like to know what your experience mod is and what it’s actually costing you, then we can help. We’re at LandscapersInsuranceHub.com.
Have questions about your workers compensation program? Learn more about our contractors insurance options or explore our full range of business insurance solutions.