Glossary of Workers Comp Premium Terms

Workers Comp 101


Administrative Regulations


Requirements and prescribed procedures of the statutory authority to regulate the workers’ compensation system.

Administrative Services Organization – ASO


A third party administrator providing payroll services and possibly workers’ compensation coverage to clients on an individual basis.

Advisory Organizations


Independent organizations like the Insurance Service Office (ISO), state specific rating bureaus and the National Council on Compensation Insurance (NCCI) which compile file policy forms, rating data, and other information for insurance companies.

Affiliation Agreement


A licensing agreement between the NCCI or a state specific rating bureau to provide workers’ compensation insurance companies with the classifications, loss costs, rating plans and forms necessary to do business.

Allocated Loss Expenses – ALE


The claim handling expenses (third party administrator [TPA] fees, attorney fees, medical report fees, etc.) that can be associated with a single claim. The ALE plus the medical cost and the indemnity cost comprise the total cost of the claim. The total cost of the claims are a factor in the calculation of premiums in some retrospective rating plans, sliding scale dividend plans and retention plans.

Assigned Risk Adjustment


A surcharge on top of the experience modification factor (mod )when the modification factor is higher than 1.00, that increases the premium for employers in an assigned risk plan.

Assigned Risk Plans


In some states, a state sponsored insurance pool for employers who can not obtain workers’ compensation insurance in the voluntary market. In other states, employers who can not obtain insurance in the voluntary market are placed with insurance companies at a higher rate than the voluntary market would normally charge.

Audit Workpaper


A worksheet showing how the premium auditor arrived at the payroll numbers used to establish the audit premium.

Audited Premium


The amount of premium due (or refunded) after the underwriter has reviewed all payroll reports for the policy year.

Average Weekly Wage (AWW)


The average earnings per week of an employee. It is calculated on the earnings of the employee prior to the injury or occupational disease. A fixed period of time (specified by the state) is used. A percentage of the average weekly wage is used to establish indemnity benefits for the employee who is unable to work after the state waiting period is completed..

Basic Classification


All classification codes except the classification codes for the Standard Exceptions. Each basic classification code is assigned a four digit number (NCCI and most independent bureaus) that is used to describe the business of the employer. Also called governing classification.

Basic Manual


A NCCI manual for writing policies which includes rules and classifications, along with state specific rates/loss costs and exceptions. The manual of rules contains examples and explanations governing premium calculations. The manual is binding for workers’ compensation insurance companies doing business within the states using the NCCI system.



Workers’ Compensation payments for medical cost of any type and indemnity payments for partial or total disability, whether temporary or permanent, plus death benefits and funeral expenses.

Calendar – Accident Year Underwriting Results


A NCCI service that provides a summary of underwriting results and loss ratios by state on a net premium basis for the previous five years for NCCI states and select Independent Bureau states.

California Workers’ Compensation Insurance Rating Bureau


A private organization licensed by the California Department of Insurance for the purpose of collecting, analyzing and compiling rating data, funding comes from assessments of the insurer members. It collects and tabulates information to develop pure premium rates. All workers’ compensation insurance companies in California are required by law to be members of the bureau.



An agreement arrived at by a collective bargain between the employer and the union for the employees to a schedule of workers’ compensation benefits that differ from the statutory program of the state. This is primarily in California, but some other states do allow for a carve-out.

Certificate of Self Insurance


A state issued certificate authorizing an employer to self-insure its workers’ compensation insurance coverage



The employee (or spouse or other family member in death cases) who makes a claim for workers’ compensation benefits for an on-the-job injury or occupational disease.

Claims Auditor


An expert in claims handling who measures the quality of the adjuster’s handling of the claim and the accuracy of the reserving. Poor quality claim handling and inaccurate reserving both have a negative impact on the calculation of the experience modification factor.

Classification Code


A system of classifying risk based on occupational or industrial categories used by both NCCI and state specific rating bureaus. The classification codes group employers with similar exposures together allowing workers’ compensation premium rates to reflect the risk associated with the occupation. It includes several thousand four digit numbers used to identify the various employer rate classes.

Classification Experience Data


Performance data by classification that summarizes premium, payroll, medical cost, indemnity cost, and claim count by injury type .



Additional descriptions assigned to a classification code within the Scopes Manual, or two descriptions using the same classification code.



A factor in the experience modification calculation that is applied to the expected losses to determine what portion of the expected losses will be primary losses within the rating formula.

Department of Insurance


A division of state government that oversees the insurance laws. The rating bureau or rate making agency for each state is a part of their state department of insurance (precise names vary by state).



A payment to the employer by the insurance company of a portion of the insurance company profits after the policy expiration subject to the performance of the insurance company and to a lesser extent the loss ratio of the insurance company.



Any person who provides work or services to an employer in exchange for compensation. In some states volunteers who are not compensated are considered employees if they providing work or services. In some states a sole proprietor or business partner who specifically includes themselves as employees on a policy of workers’ compensation insurance.



Any corporation, partnership, sole proprietor, firm, association, or local and state governments compensating individuals for work or services provided in furtherance of the employer’s interest.

Employer Mutual Association


Employers who join together to purchase workers’ compensation insurance. It normally will include only employers in the same type of business and who have similar exposure to loss.

Excess Losses


The amount of the claim over and above the primary loss that is used to in the calculation of the experience modification factor. In NCCI states, the primary loss is capped at $5,000, the excess loss would be the amount over $5,000. Excess losses are capped in most states at $100,000. In non-NCCI states, the amount of excess loss will vary depending the cap for primary losses. The dollar amount of the excess loss that is used in the calculations is referred to as the ratable excess loss.

Expected Loss Ratio – ELR


In calculating the experience modification factor, the expected loss ratio is a percentage applied to the employer’s payroll to determine the probable amount of losses for an employer of the same size in the same classification code.

Experience Modification Factor


A predictive indicator of future losses based upon the employer’s prior losses. It is an adjustment to the manual premium for a classification code provided by the NCCI or the independent state rating bureau.

Experience Period


The time frame used to calculate the experience modification factor. The payroll data and the claim losses within the experience period are used to produce an experience rating for the employer. The experience period is usually the three year period starting four policy years earlier. If the employer has not been in business for four years, the experience rating can be for a shorter period of time or may reflect the experience rating of other employers with the classification code.

Experience Rating


A method of determining premium by comparing the employer’s loss characteristics to other employers in the same classification code. It facilitates employers with better than average history of claim losses to have lower insurance premiums and employers with a poor claims history to pay more their workers’ compensation insurance.



The submission of rating plans, policy forms, endorsements, riders, manuals, rating schedules, and other forms and documents to the state department of insurance or the rating bureau for approval prior to the implementation and use of the information reflected on the submission.

General Inclusions


For purposes of classification, employees who are not a part of the main operation of the employer, but are support personnel working within the same legal entity. The payroll of general inclusion employees is calculated in the employer’s classification code. Examples of general inclusions employees would include the janitorial staff, the cafeteria staff, the company nurse and the insured’s own IT department.

General Exclusions


Occupations that are so dangerous or so different that they are classified separately from the employer’s basic classification code. When the premium is calculated for the employer, the payroll for the “general exclusions” employees has to broken out and calculated separately. Examples of general exclusions employees would include sawmill operations, stevedoring, employer operated day care services, new construction for the employer by the employer’s own employees, and aircraft operations.

Governing Classification


Normally, the classification code assigned to the employer. It is the classification code that has the highest payroll, excluding the standard exceptions. Also referred to as the basic classification.

Guaranteed Cost


A type of workers compensation insurance policy where the only reason the premium would be adjusted is due to a change in payroll during the policy term. It is not subject to adjustment in cost due to claim losses.

Inclusion Form


A state approved form used by a sole proprietor of a business to elect inclusion for workers’ compensation insurance coverage or to revoke a previous election of inclusion.

Incurred Losses


The total anticipated cost of claims. It includes both the paid amounts for medical, indemnity and expense plus the reserves for future medical, indemnity and expense. The incurred losses are used to calculate the expected loss ratio in the experience modification factor. This is particularly important in retrospective rating policies, large deductible policies and sliding scale dividend plans.

Indemnity Benefits


The payment to the employee for the loss of wages or the ability to earn wages provided by the workers’ compensation insurance policy.

Indemnity Claim


A workers’ compensation claim where the employee (or the surviving spouse of a deceased employee) receives indemnity benefits in addition to the medical benefits.

Independent Bureau


A rating agency in one of the non-NCCI states that performs in their own states the functions of employer classifications, collecting data for rate making calculating employer modification factors. The independent bureau may also write the state underwriting manuals and establish premiums. In some states the independent bureau may also administer the state assigned risk plan.

Independent Contractor


A person or company who provides work and services for an employer for compensation, but is not under the direction and control of the employer like an employee is.

Independent Premium Auditor


An outside consultant hired by the employer to verify the accuracy of the premium billed. The auditor will review the employer’s payroll information, the classification codes used, the experience rating worksheet calculations, the employer’s loss history, the premium payments, the declaration page, the insurer’s premium audit billing statements and any special rating plans to identify miscalculations in the employer’s workers’ compensation premium.

Installment Payments


An option granted by some insurers for the employer to pay the policy premium in quarterly installments based on quarterly recalculation of the policy premium. Also, some employers offer a “pay as you go” option with monthly recalculation of the policy premium.



Coverage by contract in which one party agrees to be responsible for risk of financial loss by another that occurs and meets the terms of the contract.

Insurance Service Office – ISO


An advisory organization that provides statistical, actuarial, underwriting, policy language, technical services and claims information to workers’ compensation insurance companies. The ISO uses data management, data analyze and expertise in predictive modeling to assist insurance companies in policy and premium management.

Interstate Rating


The use of experience modification factors in more than one state for employers who have payroll in more than one state. This allows employers to have only one experience modifier and makes it easier to calculate the premium of large employers with multi-state operations. This works well in the NCCI states, and most other states, but is not accepted in Delaware, Michigan and Pennsylvania. Employers who have operations in these three states will have a separate experience modification factor for the employees in these three states.

Loss Costs


The actual or expected cost to an insurer for indemnity payments, medical payments and allocated loss expense, but does not include the insurer’s overhead cost. Also called pure premium.

Loss Run


A computer print out reflecting the amount of money the insurance carrier has paid on each claim, both open claims and closed claims, and the amount of money that has been set aside to pay the remainder of the open claims. Other data can be included in the loss run including a description of the injury, the body part injured, the location or department the employee works for, etc.

Loss-Sensitive Policy


An insurance policy whose premium is recalculated after the end of the policy term to reflect the cost of claims during the policy term. This includes retrospective rating plans, large deductible policies and sliding scale dividend policies.

Manual Premium


The preliminary premium calculated by multiplying the payroll by the rate for the classification for workers’ compensation insurance policies. This is the premium prior to the application of the experience modification factor, applicable credits and/or premium discounts.

Manual Rates


The rate stated for each classification code. It is stated as dollars per $100 of weekly earning for all employees in the classification code.

Medical Benefits


The benefits owed to the employee for medical care arising out of an on-the-job injury or occupational disease. This includes doctors, hospitals, diagnostic services, nursing care, etc.

Merit Rating


When an employer is too small to qualify for an experience modification factor, a premium adjustment, either a credit for a good claims history, or a debit for a poor claims history is made to reflect the potential cost of future claims.

Minimum Premium


The minimum premium is the amount necessary to cover the cost of underwriting and issuing the policy. When a small employer’s payroll is inadequate to cover the cost of policy issuance, the minimum premium is charged rather than the premium calculated by multiplying the class code by the annual payroll in hundreds. For example, a sole proprietor who does not cover himself for work comp, but buys coverage for his part-time bookkeeper.



An error by the rating bureau or insurer placing an employer in the wrong classification code, resulting in an incorrect premium being charged. Misclassification also occurs when an employer misrepresents the nature of the business in order to be classified in a classification code that has a lower manual rate. When an employer classifies an employee as an independent contractor to lower the reported payroll, misclassification occurs. Any error, intentional or not, that causes the premium calculation to be erroneous.



Misrepresentation is similar to misclassification. It is an intentional act on the part of the employer to lower the workers’ compensation insurance premiums by providing false or incorrect information. This can include incomplete or partial payroll information, failure to keep accurate records on the number of employees, the classifying employees under the standard exceptions who do not fit the definition of standard exceptions, failure to report claims and others acts intended to deceive the workers compensation insurer.

Modified Premium


The manual premium adjusted by the experience modification factor, but before the application of any scheduled credits or premium discounts. It is the same as the standard premium.

National Council on Compensation Insurance (NCCI)


An organization of workers’ compensation insurance companies which acts as the rating organization in approximately two-thirds of the states. NCCI establishes standards for use in rate making, develops policy forms, collects statistics, and provides statistical support services. NCCI writes the manuals used in many states to calculate workers’ compensation premiums. It is a non-profit corporation owned by the workers’ compensation insurance companies. In some states NCCI administers the state Assigned Risk Plan.

New York Compensation Insurance Rating Board


A private, non-profit association of licensed insurance companies that provide workers’ compensation insurance in New York; the organization is responsible (among other things) for collecting and reviewing compensation loss experience from carriers, developing policy forms and rating plans, conducting actuarial analysis and preparing rate filings with the New York State Insurance Department.

Notice to Employees


A notice required in some states posted in the employer’s workplace to notify its employees of its workers’ compensation insurance coverage. Same as Posting Notice.



A financial payment to the Department of Insurance or to the rating bureau for failure to comply with the rules and regulations.



The classification code description filed and approved for use by state department of insurance and/or rating bureau for a particular state.

Policy Audit


When the insurer requests actual payroll figures during of at the end of the policy year in order to determine if any adjustments to the policy premium are needed.

Posting Notice


A notice required in some states posted in the employer’s workplace to notify its employees of its workers’ compensation insurance coverage. Same as Notice to Employees.



The total cost for an insurance policy. It is calculated by multiplying the rate for the classification code times the employer’s payroll divided by 100. It includes the initial amount paid at the start of the policy year and includes the amount of any additional assessment based on payroll adjustments or adverse loss experience on loss sensitive policies.

Premium Auditor


An employee of the workers’ compensation insurance company, or an employee of an outside vendor hired by the insurance company, who determines the actual exposure for a policy year by reviewing the classification codes, experience modification factor and the payroll information. The premium auditor determines the amount of the final premium bill sent to the employer.

Premium Discount


A reduction in the amount of premium due, or a credit against the amount of premium owed. It is often a percentage of the total premium, calculated on a sliding scale based on the size of the premium.

Primary Losses


In the NCCI states and some of the independent bureau states, the primary loss is the first $5,000 paid on a single claim.

Pure Premium


The actual or expected cost to an insurer for indemnity payments, medical payments and allocated loss expense, but does not include the insurer’s overhead cost. Also called loss costs.



The amount per $100 of payroll that is needed to cover losses and expenses.

Rating Bureau


A private organization licensed in the non-NCCI states by the state’s Department of Insurance for the purpose of collecting, analyzing and compiling rating data, funding comes from assessments of the insurer members. All workers’ compensation insurance companies in the states are normally required by law to be members of the bureau.

Rating Organization


Same as Rating Bureau.



A fancy work for payroll. All forms of compensation recognized by the employer’s state including salary, wages, bonuses, commissions, etc. that compose the overall payroll of the employer. The payroll is used calculate the workers’ compensation premium by multiplying the rates for each of the employer’s classifications by hundreds of dollars of remuneration (payroll).

Retention Plan


A workers’ compensation insurance policy where the premium can be adjusted up or down based on incurred losses that have occurred during the policy period.

Retrospective Rating


A formula of premium calculation, for a loss sensitive insurance program, that reviews the previous loss experience and, after the policy year ends, adjusts the premium based on the actual loss experience. Some plans provide a guaranteed maximum cost; some guarantee that the premium will not exceed the standard premiums otherwise applicable.

Risk Sharing


The transfer of risk or uncertainty of financial loss by an insurance contract. In workers’ compensation, many employers joined together through the insurance company to share the risk of employees being injured on the job.

Safety Program Discounts


A discount applied to the calculated premium based on the employer having a safety program that has been reviewed and approved by the workers’ compensation insurer.

Schedule Credit/Debit


An adjustment of the insurance premium by the underwriter to account for factors not accounted for in the experience modification factor. See schedule rating.

Schedule Rating


At the option of the underwriter, a percentage modification of the class rate premium based on specific characteristics of the insured such as an approved safety program, on-site medical facility, an approved training program or unusual activities for the type of business.

Scopes® Manual


A comprehensive description of each class codes, cross references, and state special classification produced by NCCI. The manual also provides practical information about the application of each code.

Self Insurance


A risk management method where an employer (or association or group) assumes the responsibility of paying the workers’ compensation claims that arise. This is in lieu of purchasing workers’ compensation insurance from a private carrier. The employer must meet the financial requirements set by the state Department of Insurance and have the funds or assets available to pay all claims.

Short Rate Penalty


A penalty charged the employer for canceling the insurance policy before the end of the policy period. It is usually steep in the early part of the policy — to offset part of the underwriting cost – and declines gradually over the policy term.

Sliding Scale Dividend


A dividend plan that varies the size of the dividend payment, after the policy expiration, based on the loss ratio of the insured

Standard Exceptions


Classification codes for clerical office employees, clerical telecommuter employees, outside salespersons, collectors, messengers, drivers and their helpers, chauffeurs and their helpers, and drafting employees. These classifications are not included in the governing classification codes.

Standard Premium


The premium adjusted by the experience modification factor, but before the application of any scheduled credits or premium discounts. It is the same as the manual premium.

State Average Weekly Wage


Average weekly earnings of all workers within a state, determined annually by the the state labor department or the state insurance department. The statewide average weekly wage is a computation of average wages paid to workers in a jurisdiction for a set period of time and is generally used to calculate the minimum, and maximum, amounts of workers’ compensation benefits that an injured employee will be entitled to receive.

State Insurance Fund


A quasi-public agency whose activities include a) providing workers’ compensation insurance coverage to private and public employers; b) providing other lines of insurance coverage; and c) acting as an agent in some states in workers’ compensation cases involving state employees. The State Insurance Fund normally must offer workers’ compensation insurance to any employer requesting it, making the Fund an “insurer of last resort” for employers otherwise unable to obtain coverage.

State Special or State Special Codes


When individual states decide to modify the NCCI classification codes to accommodate certain industries within its state.

Stop Work Orders


A stop work order instructs a business to cease all operations when it does not have workers’ compensation coverage in place.

Third Party Administrator – TPA


An independent organization that is contracted to provide administrative services including claims processing and underwriting for other entities, such as insurance companies or employers. The TPA normally does not have financial responsibility for the results of its claims processing, underwriting or other services.

Uninsured Employers’ Fund:


A special fund available in some states which provides for the payment of workers’ compensation cases where the employer was not insured nor self-insured and has defaulted in the payment of workers’ compensation.

Voluntary Compensation


The extending of workers’ compensation coverage to sole proprietors, partners and other employees of a business who are not normally covered for workers’ compensation insurance. This is done by an endorsement to the workers’ compensation policy at the time it is written.

Voluntary Market


The insurance market for worker’ compensation coverage where the employer and the insurer can chose do do with each other, as opposed to an Assigned Risk Plan where the employer and insurer are compelled to do business with each other.

Workers’ Compensation Administrative Regulations


Regulations adopted in accordance with statutory authority to prescribe procedures and requirements regarding activities within the workers’ compensation system.

Workers’ Compensation Board


The agency charged with administering the Workers’ Compensation Law. Also known as industrial commissions in some states.

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