Every industry has its unique challenges and liability exposures. For example, construction workers face far different physical risks (like machinery malfunction, injury, and causing property damage) than those who work in IT (such as carpal tunnel, repetitive stress injuries, and eyestrain).
To adjust workers' compensation insurance rates based on these differences, insurance companies use industry classification codes. These codes level the playing field for what businesses in the same industry in the state pay for coverage.
Additional factors help determine what a company ends up paying, but the industry classification codes ensure that companies competing with one another pay a fair amount based on the common hazards their employees face.
Why Do Industries Need Classification?
Classification codes help measure the level of physical risks employees in a specific field are exposed to. In effect, they represent the likelihood of employees filing workers' comp claims within a policy period.
While there are different types of classification systems, they all generally assess a business's operations, environment, and risk factors to determine the likelihood of employees sustaining an injury on the job or contracting an occupational illness.
In most states, your insurance agency (or those you request quotes from) will ask you a series of questions related to your business's daily operations to help determine your risks and appropriate classification. These questions may cover whether your employees drive a company car, how often they're out in the field, if they work with hazardous materials, and whether they work in potentially unstable environments.
Insurance agencies use these questions and other factors, such as how many employees you have or where you're physically located, to determine your workers' comp insurance rate.
These codes are necessary because they ensure that relatively low-risk fields, such as office-based jobs, don't pay the same workers' compensation rates as businesses in a higher-risk industry, such as miners.
The NCCI and Other State Systems
Classification systems vary by state, with some electing to use their own codes. The National Council on Compensation Insurance (NCCI) provides a commonly used classification system for states that don't have their own.
The NCCI is a national organization that rates insurance agencies in the U.S. and collects data about workers' compensation claims. Outside of maintaining national classification codes, the organization collects and analyzes data about workers' compensation trends and costs.
Additionally, the organization helps employers and employees understand how proposed legislation and changes in the law affect their workers' compensation. All the data collected helps the NCCI make and manage an online database and various manuals.
If you run a business in the following states (or the District of Columbia), your insurer will use NCCI codes to determine your workers' compensation risks:
- New Hampshire
- New Mexico
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- West Virginia
Other states (plus Puerto Rico and the U.S. Virgin Islands) use their own independent systems to classify industries. Among these states are the four with monopolistic state funds for workers' compensation.
- New Jersey
- New York
- North Carolina
- North Dakota
How Insurers Calculate Rates
The precise mechanism for determining workers' compensation premiums varies by state, but insurance providers in states using the NCCI system multiple the following numbers to come up with an amount:
- Workers' Class Code Rates– Insurers used the designated rate for your business's assigned classification code. The more risk exposure, the higher the cost.
- Claims Experience Modifier– The modifier will adjust your premiums based on your company's past losses, which is determined by comparing losses at your business to the state average in your industry.
- Total Payroll Divided by $100– The more employees you have, the more you'll have to pay for workers' compensation.
If you're a relatively new business or have made changes that may affect your premiums, consider talking to multiple insurance agencies to ensure you get the best price. As your company evolves, so too may your insurance needs.
When this happens, be sure to ask for multiple quotes before deciding on a provider. Choosing the first company you find or the company you worked with in the past may result in you paying higher premiums than necessary. To get started, you can click here to request a workers compensation insurance quote online.
Avoid Overpaying for Workers' Comp Coverage
The best way to ensure you're paying a fair amount for workers' compensation is by understanding how classification codes work. Make sure you know which code system your state uses, and shop around for quotes before making your final decision. Doing so ensures that you and your employees are protected while also avoiding overpaying on premiums.