Business Insurance Costs Explained: How Premiums Are Calculated

The CDI calls the measures that insurers price against "rating exposures." For property, its guide lists square footage, type of construction, sprinklers and the fire protection classification. For general liability, it lists square footage, payroll or gross sales, depending on the classification codes used. CDI rating explanation.

The same CDI guide says the deductible "will be calculated in the rate." It adds that the basic equation often uses modification factors, "which can include experience modifications, schedule rating, or judgment rating." The NAIC glossary defines a rate as the "value of insured losses expressed as a cost per unit of insurance." NAIC insurance glossary.

Use this table to ask the same questions about every proposal:

Rate rules differ by state and by type of insurer. In Texas, licensed insurers' rates and forms are regulated by TDI, while surplus lines insurers "are not required to file rates and policy forms with TDI." TDI also warns that it is common for surplus lines insurers to keep a significant portion of the premium if you cancel midterm. TDI commercial general liability guide.

For workers' compensation in California, the CDI says insurers' rates "must be filed with the CDI." The commissioner will not allow rates that are inadequate, unfairly discriminatory or tend to create a monopoly. CDI workers' compensation guide. Some regulators review rates before use: the NAIC defines prior approval as "a state regulatory requirement for pre-approval of all insurance rates and forms." NAIC insurance glossary.

Rating organizations also shape prices. In California, the Workers' Compensation Insurance Rating Bureau (WCIRB) develops the classification codes and calculates experience modifications using a formula approved by the CDI. CDI workers' compensation guide. In the states that use its plan, the National Council on Compensation Insurance (NCCI) computes the modifications. NCCI ABCs of Experience Rating. Ask your provider which bureau's classifications and modification apply to you.

Workers' compensation is usually priced on payroll in each job classification. The CDI explains that "the payroll for each classification is estimated and then multiplied (per each $100 of payroll) by the applicable rate." It adds that the final premium "cannot be calculated until the policy term is over and the employer's payroll records have been audited." CDI workers' compensation guide.

NCCI describes the calculation in three steps. First, employers are grouped by business operation or classification, and a rate approved by the state for each class is applied per $100 of payroll. Second, the premiums for each class are added together. Third, an experience rating modification (often called the mod or EMR) is applied. The mod compares your payroll and loss record with the average employer in the same classification. NCCI ABCs of Experience Rating.

A mod of 1.00 is called unity. NCCI calls a mod below 1.00 a credit mod and a mod above 1.00 a debit mod. In NCCI's own illustration, $100,000 of premium before the mod becomes $75,000 with a 0.75 mod and $125,000 with a 1.25 mod. The experience period is generally three years of payroll and loss data. For a policy renewing January 1, 2026, NCCI's example uses the policies that began January 1 of 2022, 2023 and 2024; the 2025 policy year is not yet included. NCCI ABCs of Experience Rating.

Our workers' comp and EMR calculator runs this arithmetic with the payroll, rate and mod you enter from your own proposal or worksheet. For the mod itself, see how to check your EMR worksheet. Before the year-end audit, the workers' comp audit checklist lists the payroll records to gather. Our workers' compensation coverage guide explains what the policy covers.

State systems change the method

In the 2025 edition of its experience rating guide, NCCI reports that 39 jurisdictions have approved its experience rating plan. The plan does not apply in California, Delaware, Michigan, New Jersey, New York or Pennsylvania. It also does not apply in the four monopolistic states (North Dakota, Ohio, Washington and Wyoming), which "administer their own plans and rates." Independent rating organizations in Indiana, Massachusetts and North Carolina produce their own intrastate mods. NCCI ABCs of Experience Rating.

Washington shows how different a state system can be. Its Department of Labor & Industries (L&I) says "most workers' compensation insurance risk classifications and premiums are based on hours worked instead of payroll." Employees also pay half of some portions of the premium. Washington L&I rating features.

Texas is different again. The Texas Department of Insurance says private employers "can choose to carry workers' compensation insurance coverage, but it is not required in most cases." TDI workers' compensation for employers. The state requirements checklist helps you list the questions to confirm with your own state's agencies.

Official workers' compensation figures and what they measure

Regulators in California, Washington and Oregon publish average workers' compensation figures. Each measures something specific, shown in the right-hand column.

The three figures use different bases, so do not compare them with each other. California's figure is a pure premium rate. Oregon's report defines pure premiums as "the expected amount necessary to pay benefits for claims, excluding any other costs incurred by the insurer." Insurers then apply a multiplier for their "expenses, taxes, and profits." Oregon DCBS 2024 rate ranking. Oregon's figure is an index normalized to Oregon's mix of industries. Washington's figure is a change in an hourly rate.

Your own premium still depends on your class codes, payroll or hours, mod and insurer.

For general liability, the CDI says the way a business is classified "is the first step to determine premium." The rating formula can then use square footage, payroll or gross sales, depending on the classification codes. CDI commercial insurance guide. The NAIC adds that premiums for business liability coverage "depend on the type of product or service provided and the perceived level of risk." NAIC small business insurance.

Most general liability premiums are estimates at the start. TDI explains that "most CGL policies are auditable policies." The opening premium is a deposit based on estimated payroll, sales or units sold. Usually after the policy ends, the insurer can examine your records and charge more or return premium. TDI commercial general liability guide.

Our general liability coverage guide explains what the policy covers. The general liability cost planner builds a checklist of the business details and policy questions a proposal depends on. If your premium is based on sales, see how to reconcile revenue before a GL audit.

For a building, the CDI lists square footage, type of construction, sprinklers and the fire protection classification as rating factors. CDI commercial insurance guide. Fire protection is commonly measured with Verisk's Public Protection Classification (PPC), "a number from 1 to 10." Class 1 generally represents superior fire protection. Class 10 means the area's fire suppression program does not meet Verisk's minimum criteria. Verisk says "virtually all U.S. insurers of homes and business property" use these classifications in calculating premiums. Verisk PPC FAQ.

Your choices also change the price. The CDI notes that open perils coverage "is more costly than a specified perils policy" because it offers broader protection. It also explains that you are required to insure buildings to value; if you do not, you can face a monetary penalty, called coinsurance, at the time of a loss. CDI commercial insurance guide. Read coinsurance questions before choosing a limit before you lower a limit to save premium.

Valuation matters too. TDI explains that replacement cost coverage pays to repair or replace at current costs, while actual cash value "pays replacement cost minus depreciation." TDI commercial property guide. Ask for both options if price is a concern, and compare what each would pay after a loss.

A business owners policy (BOP) is a package that typically includes property, business interruption and liability coverage. The NAIC says "for many small businesses, purchasing a BOP can be a less costly option than buying individual policies." NAIC small business insurance. The CDI notes that BOPs are written with "strict underwriting guidelines," including maximum square footage, so not every business qualifies. See our business owners policy guide for what to compare.

The CDI explains that commercial autos are classified "by weight (light, medium, heavy, extra heavy) and by type of use (private passenger, service, commercial)." Coverage can differ by vehicle. Business auto policies commonly use a combined single limit, and the CDI says "common commercial automobile CSLs are $500,000 or $1,000,000." CDI commercial insurance guide.

Give every provider the same list of vehicles, drivers, garaging locations and business uses. Then ask which details were rated and how each coverage is priced by vehicle. Our commercial auto guide explains how to describe owned, hired and non-owned vehicle use.

Professional liability (errors and omissions) can also be auditable. TDI says insurers "use payroll, sales, billable hours, or number of clients to calculate your estimated premium," then usually compare the actual figures after the policy ends. TDI professional liability FAQ.

Many of these policies are claims-made, which affects price over time. TDI explains that claims-made policies "may be less expensive in their early years as the potential for claims increases as policy years accumulate." If a claims-made policy ends, extended reporting ("tail") coverage is "provided for an additional premium" and may run one, three or five years, or be unlimited. TDI commercial general liability guide.

See our professional liability guide. Before switching insurers, use the retroactive date continuity checklist.

Cyber. The NAIC says "most commercial property and general liability policies do not cover cyber risks, and cyber insurance policies are highly customized for clients." NAIC cybersecurity topic. Because policies differ, ask which application answers affect the price, such as the data you hold and the security controls in place. The cyber insurance preparation checklist helps you organize those answers. Our cyber insurance guide covers the policy itself.

Umbrella. The CDI says a commercial umbrella "covers the amount of loss above the limits of a basic liability policy." It adds that it is common to have a self-insured retention (SIR) "of at least $10,000," which you pay before the umbrella responds to a loss that no underlying policy covers. CDI commercial insurance guide. Ask what underlying limits the umbrella requires, and price your other liability policies at those limits. See our umbrella insurance guide.

Directors and officers (D&O). Ask which financial, ownership and claims information the application requests. Our D&O insurance guide explains the coverage.

The CDI says "the higher the deductible (the amount you choose to self-insure) the lower the rate." It also cautions against choosing deductibles so large that they jeopardize your company's finances. CDI commercial insurance guide. TDI makes the same point: higher deductibles lower premiums, but you pay more out of pocket if you have a claim. TDI commercial property guide.

Ask each provider to price the same coverage at two or three deductible and limit combinations. Then compare the premium difference with the cash your business could actually spend on a loss. The deductible cash-flow worksheet helps with that comparison.

Your own record affects price. The CDI states that "claims loss experience is reflected in the rating formula and directly affects premium costs." It adds that when loss control methods are implemented, "your premium costs go down as your loss experience improves." CDI commercial insurance guide. TDI notes that most insurers offer loss-control or risk-reduction services, and that safer, better-maintained workplaces "can help you save money on your premiums." TDI commercial property guide.

Prices can also rise without a claim. Washington L&I explains that "risk is pooled across all of the risk classifications," so even a business with no claims counting against its experience factor could see its rate go up "if the rate for the risk class is increasing." L&I sets its proposed rates each year after reviewing expected payouts, the size of its contingency reserve, wage inflation and other indicators. Washington L&I rate notice.

Plan for amounts that can change after you buy:

• Audit adjustments. Auditable policies, including many general liability, professional liability and workers' compensation policies, can produce additional or returned premium once actual payroll, sales or other exposures are known. See TDI on general liability audits, TDI on professional liability audits and the CDI on workers' compensation audits.
• Endorsements. Some coverage is added by endorsement for an extra charge. TDI gives product recall coverage on a CGL policy as one example. TDI commercial general liability guide.
• Tail coverage. Ending a claims-made policy can mean paying an additional premium to extend the reporting period, as described above.
• Cancellation terms. Ask how much premium you would get back if you cancel midterm, especially with a surplus lines insurer.
• Fees and payment plans. Ask for policy fees, installment charges and any minimum premium in writing, separately from the premium.

A useful budget starts with your exposures, not an average:

1. Gather payroll by job duty, annual sales, square footage, building details, vehicles and drivers.
2. Ask every provider to price the same limits, deductibles and coverage forms.
3. Request the class codes, rates, modifiers, audit terms and fees behind each premium.
4. Put the proposals side by side in the quote comparison worksheet.
5. Review the figures before each renewal using the renewal cost review.

If you are not sure which coverages to price, the business insurance assessment lists coverage topics for your industry to discuss with a licensed professional. Our guide to choosing business insurance covers the rest of the buying process.