Does Your Workers Comp Go Up After a Claim?
Understand the complex relationship between workers' compensation claims and your insurance premiums. Learn how your rates are truly affected.
Workers’ compensation insurance covers medical expenses and lost wages if a worker is injured or becomes ill on the job. Business owners often wonder if filing a claim increases their insurance premiums. Claims influence premium costs through the Experience Modification Rate (EMR), a key factor in rate calculation.
How Workers’ Compensation Premiums Are Determined
Workers’ compensation premiums are determined through a calculation that involves several core components. Insurers categorize businesses based on the inherent risk of injury within their industry, assigning classification codes to different job roles. More hazardous industries or roles, such as construction, typically have higher base rates compared to lower-risk environments like office settings. This classification, along with the company’s total payroll, forms the foundation of the manual premium.
The manual premium is calculated by multiplying a rate per $100 of payroll by the total payroll for each employee classification. This base premium is then adjusted by a unique multiplier for each business, known as the Experience Modification Rate (EMR). The EMR personalizes the premium based on a company’s past claim history compared to similar businesses. New businesses typically begin with an EMR of 1.0, signifying an average risk profile.
The Impact of Claims on Your Experience Modification Rate
Workers’ compensation claims directly influence a company’s Experience Modification Rate (EMR). The EMR compares a company’s actual incurred losses from claims to the expected losses for businesses of similar size and type within the same industry. If a company’s actual losses are better than expected, its EMR will be below 1.0, resulting in a credit or discount on its premiums. Conversely, if actual losses are worse than expected, the EMR will rise above 1.0, leading to a debit or surcharge on premiums.
The calculation of the EMR considers both the cost and the frequency of claims over a specific “experience period,” typically a three-year timeframe excluding the most recent policy year. Claims filed today will continue to influence the EMR and premium costs for several years. Insurers include amounts paid out on claims and reserves (estimated future costs for open claims) in the EMR calculation. While both the severity (cost) and frequency (number) of claims contribute to the EMR, the frequency of claims often carries a greater weight in the calculation, as it can indicate more systemic safety issues within a workplace.
Key Factors Affecting Claim-Related Premium Changes
Several specific variables within a workers’ compensation claim can significantly influence the magnitude of premium changes. Claim severity, which refers to the total cost of an injury including medical expenses and lost wages, directly impacts the EMR. More severe claims naturally contribute a larger financial burden to a company’s loss history.
The frequency of claims also plays a substantial role. Multiple smaller claims, even if their cumulative cost is similar to a single large claim, can have a more detrimental effect on the EMR. This is because a high frequency of incidents may signal underlying safety program deficiencies or inadequate risk controls.
The status of a claim, whether it is open or closed, also affects the EMR calculation. Open claims carry reserved amounts, which are the insurer’s estimates of future payments, and these reserves are factored into the EMR. Prompt and efficient closure of claims, ideally with lower total payouts, can mitigate their impact on the EMR. Subrogation can reduce the net cost of a claim. If a third party is responsible for an employee’s injury, the workers’ compensation insurer may pursue subrogation to recover the costs, which can then reduce the claim’s ultimate impact on the employer’s EMR.
Implementing Return-to-Work (RTW) programs can lessen the financial impact of claims. These programs aim to bring injured employees back to modified duty as soon as medically possible, even if it’s not their full pre-injury role. By minimizing the duration of lost wage payments and potentially shifting lost-time claims to less costly medical-only claims, RTW programs reduce the overall cost of a claim. This reduction in claim costs translates to a more favorable EMR, leading to lower workers’ compensation premiums over time.
Understanding Premium Adjustments and Timing
Premium adjustments related to workers’ compensation claims typically occur on an annual cycle. The Experience Modification Rate is usually calculated once a year, based on the company’s claims data from a specific “experience period.” This period commonly spans three years, excluding the most recent policy year, to allow for claims to develop and mature. For example, a 2025 EMR might be based on claims data from 2021, 2022, and 2023.
Changes resulting from a claim’s impact on the EMR are generally applied at the company’s annual policy renewal date. This means that an incident occurring today may not immediately affect your current premium, but its influence will be reflected in the premium calculated for the next policy term and potentially for subsequent years within the experience period. A single claim can continue to affect the EMR for the entire three-year experience period. Insurers also conduct year-end payroll audits to reconcile estimated payrolls with actual figures; discrepancies can lead to further premium adjustments.