An insurance premium is the price you pay an insurance company for coverage during the policy period. Insurers calculate it by multiplying a rate by your exposure base, such as payroll, gross sales, or property values, then adjusting the result for your loss history, credits, and surcharges.
The premium appears on your declarations page and on every invoice, but the math behind it lives in the insurer's rating manuals. Understanding the three moving parts tells you which ones you can actually influence.
Insurance Premium
The amount charged by an insurer for coverage during the policy period, calculated by applying rates to the insured's exposure base and adjusting for experience and schedule modifications.
How are insurance premiums calculated?
Three ingredients: an exposure base, a rate, and modifications. The exposure base measures the size of your risk. Workers compensation uses remuneration, meaning payroll, and general liability commonly uses payroll or gross sales, while property uses building and contents values.
The rate is a price per unit of that base, set by classification. In workers compensation, every job classification carries a code and a rate per $100 of payroll. A retail shoe store under code 8008 with $1,000,000 of expected payroll and a rate of 1.28 generates $12,800 of premium before adjustments.
Riskier classifications carry higher rates, which is why a roofing payroll dollar costs many times a clerical payroll dollar. You control the base by how you grow, and you influence the classification by keeping payroll records that separate duties cleanly.
What do experience mods and other adjustments change?
After the base premium is computed, modifications move it up or down. The biggest one for workers compensation is the experience modification rate, a factor built from your past losses. A 1.15 mod raises the shoe store's premium about 15%, while a 0.85 mod cuts it. Your loss runs feed that factor, which is one reason a higher deductible that keeps small claims off the books can pay for itself.
Insurers also apply schedule credits and debits for safety programs and housekeeping, premium discounts on larger accounts, and fixed charges like an expense constant. Each item appears as its own line on the workers compensation Information Page, so you can see exactly where the number came from.
Why did you get a premium bill after the policy ended?
Because premiums on payroll and sales based policies start as estimates. At the end of the term the insurer audits your actual exposures and recalculates. If actual payroll ran higher than the estimate, you owe the difference. If it ran lower, you get a refund or credit.
The auditor will ask for payroll journals, 941 tax filings, and overtime records, and will reclassify payroll that your records cannot separate into the highest applicable rate. Clean quarterly records are the cheapest premium reduction available.
Frequently asked questions
What is the difference between a premium and a deductible?
The premium is the price you pay for the policy whether or not you ever have a claim. The deductible is the share of each covered loss you absorb when a claim happens. Raising the deductible typically lowers the premium.
Why did my premium go up with no claims?
Rates and exposures both move. Carriers file rate increases, your payroll or sales grew, property values rose with construction costs, or a scheduled credit expired. Ask your broker to show renewal rating side by side with the expiring policy.
What is a premium audit?
An end of term review comparing your estimated exposures to actual figures from payroll and sales records. The insurer bills the shortfall or refunds the excess. Refusing the audit usually triggers an audit noncompliance charge, so cooperate and prepare records early.
What is a minimum premium?
The smallest amount the insurer will charge for issuing the policy, regardless of how low your audited exposures come in. On the workers compensation Information Page it appears as its own line, often a few hundred dollars.
This definition is for educational purposes. Your policy's specific terms, conditions, and endorsements control. Talk to a licensed broker about your actual exposures.