Claims Experience
Your company's claims history significantly impacts workers' compensation premiums. Insurers calculate an "experience modification factor" based on your past three years of claims (excluding the most recent year). Frequent claims, even small ones, can increase this factor substantially. A single large claim might raise rates by 10-30%, while multiple claims can trigger even steeper increases. Claims involving severe injuries or extended disability periods have particularly pronounced effects on premium calculations. This experience-based rating system means that companies with similar payrolls in identical industries may pay dramatically different rates based solely on their claims history.
Industry Risk Classification
Your business's industry classification code fundamentally determines baseline workers' compensation rates. Insurance companies regularly reassess industry risk levels based on emerging claim patterns. Industries experiencing increasing injury rates or more severe claims see corresponding rate increases applied to all businesses within that classification. Additionally, if your operations evolve to include higher-risk activities, your classification may change, potentially triggering substantial premium increases. Even subtle shifts in job duties can sometimes result in reclassification to higher-rate categories.
Payroll Growth
Workers' compensation premiums are calculated directly based on payroll figures. As your payroll expands through hiring, wage increases, or overtime, your premiums increase proportionally, even if your rate remains unchanged. Companies experiencing rapid growth often face surprising mid-term premium adjustments during annual audits. Expanding into new states can also drive premium increases, as workers' compensation rates and requirements vary significantly across jurisdictions, with some states imposing substantially higher base rates.
Regulatory Changes
State-level regulatory decisions significantly impact workers' compensation costs. Legislatures and workers' compensation boards periodically adjust benefit structures, coverage requirements, and medical fee schedules. Expanded presumptive coverage for certain occupations or conditions increases insurer costs, which translate to higher premiums. Healthcare inflation affects workers' compensation particularly severely, as injured worker treatment often exceeds general medical inflation rates. When state funds operating as insurers of last resort experience financial pressure, they typically increase rates, influencing the entire market.
Insurance Market Cycles
The broader insurance marketplace experiences cycles that affect workers' compensation availability and pricing. During "hard market" phases, insurers become more selective and increase rates across all lines, including workers' compensation. Following major catastrophes or investment losses, insurers often raise rates across all coverage types to rebuild financial reserves, even for unrelated insurance lines like workers' compensation.