How commercial insurance premiums are calculated

The formula behind every quote

The California Department of Insurance describes commercial pricing in one line: identify the rating exposures, select the deductibles, and calculate “rate x exposure = premium”; the result is then usually adjusted by “experience modifications, schedule rating, or judgment rating”⁠¹¹. Every line on this page follows that pattern. What changes from line to line is the unit of exposure, who sets the rate, and which adjustments are allowed.

In order, a typical policy is built like this:

1. Classify the business

   The class code groups you with similar businesses and fixes the rate per unit of exposure. NCCI calls this “manual rating”: rates are “averages reflecting the normal conditions found in each classification”⁠².

2. Measure the exposure

   Payroll, sales, floor area, insured value, vehicles or hours worked, estimated for the coming year.

3. Multiply

   Exposure ÷ rating unit × rate = manual premium, one line per class.

4. Modify

   Experience rating, then schedule rating, then credits or charges for deductibles and limits.

5. Apply floors and add-ons

   Minimum premium, expense constants, assessments and taxes.

6. True up

   An audit replaces the estimated exposure with the actual figure after the term⁠¹⁴.

Loss costs, rates and loss cost multipliers

The number a rating bureau publishes is usually not the rate you pay. Missouri’s insurance department explains that NCCI’s loss costs “only reflect one component of your workers’ compensation rate — the pure cost of workers’ compensation claims by class code”, meaning medical care, lost wages and similar claim costs. They “do not include expenses common to all businesses such as salaries, rent and utilities”⁠¹.

Each insurer adds the second component itself: a loss cost multiplier (LCM) “based on the company’s own operating expenses, taxes and profit provision”. The formula is rate = advisory loss cost × LCM, and because “individual LCMs will vary greatly”, the rate for the same class differs from insurer to insurer⁠¹. Missouri’s own example uses a carpentry loss cost of 5.62 and $60,000 of payroll:

Source: Missouri Department of Commerce and Insurance⁠¹. Insurer B charges 20% more before any credit is applied.

Three kinds of published figure are easy to confuse:

• Loss cost (or pure premium): the bureau’s estimate of claims and claim-handling cost per unit of exposure. It is not a price.
• LCM: the insurer’s filed loading for expenses, taxes and profit⁠¹.
• Rate: what the insurer actually multiplies your exposure by. State funds publish full rates. Ohio’s base rates and Washington’s hourly rates are the price itself, not a loss cost⁠⁵⁠⁹.

Property works the same way. Verisk (ISO) provides “class-rated loss costs” for commercial buildings and says “the loss cost is an average for all risks in that class”⁠¹⁷. The insurer’s filed rating plan then turns that loss cost into a rate.

Workers’ compensation: per $100 of payroll, by class

Workers’ comp is rated on payroll in each class code: payroll ÷ 100 × rate. NCCI’s own worked exhibit shows why classification dominates the bill. $70,000 of clerical payroll at $0.750 produces $525, while $200,000 of roofer payroll at $63.171 produces $126,342. Total manual premium is $126,867, and with a 1.25 experience mod it becomes $158,584⁠². Those rates are NCCI’s illustration, not any state’s rates.

The official 2026 rates below come from two state funds that publish their full rates in state rules. Ohio charges per $100 of payroll. Washington charges per hour worked and has workers pay part of it through payroll deduction.

Base rates set by the state fund before experience modification. Ohio and Wyoming charge per $100 of payroll; Washington charges per hour worked, and part is withheld from wages. Other states’ insurers file their own rates; see where rates are published.

Worked example 1: Ohio office (our calculation). Five clerical employees with $400,000 of annual payroll, class 8810, at the base rate of $0.0466 per $100 effective July 1, 2026⁠⁵:

• $400,000 ÷ 100 = 4,000 units × $0.0466 = $186.40 base-rated premium.
• If the employer qualifies for experience rating, Ohio sets the rate as the experience modification times the base rate⁠⁶. At an assumed EM of 0.80 the premium is $186.40 × 0.80 = $149.12.
• At $200,000 of payroll the base premium would be $93.20. That is below Ohio’s $120 minimum annual administrative charge, which applies when premium is under $120⁠⁷, so the employer pays $120.
• Ohio’s base rates exclude the Disabled Workers’ Relief Fund assessment, which is billed with premium, but for private employers it has been set at zero since July 1, 2016 (DWRF-I) and July 1, 2015 (DWRF-II)⁠⁵⁠⁸.

The same $200,000 payroll in roofing class 5551 at $5.7709 would cost $11,541.80⁠⁵. Class matters far more than headcount.

Worked example 2: Washington office (our calculation). Five full-time clerical workers in risk class 4904, assumed at 2,000 hours each (10,000 hours), using 2026 rates⁠⁹:

• Composite rate $0.2223 per hour × 10,000 hours = $2,223.00 total.
• Workers’ share withheld from wages: $0.1007 × 10,000 = $1,007.00. The employer pays the remaining $1,216.00.
• Washington’s premium rate is the experience factor × (accident fund + medical aid + stay-at-work) + supplemental pension⁠²¹. For 4904 the experience-rated part is only $0.0311 of the $0.2223. The $0.1912 supplemental pension component is not experience-rated. At an assumed factor of 0.80, the rate falls only to $0.2161 an hour ($2,160.80 in total).

Washington rates ignore wage levels. The same 10,000 hours in roof work (0507, $5.793 an hour) would cost $57,930⁠⁹. For more on how codes are assigned, see /guides/workers-comp-class-codes/; for state-by-state rate sources, see /workers-comp-rates/ohio/ and /workers-comp-rates/washington/.

General liability: per $1,000 of sales, payroll or area

General liability is also rated by class, but the class decides which exposure base applies. California’s regulator says the GL formula “can be based on square footage, payroll, or gross sales depending on the general liability classification codes used”⁠¹¹. Virginia adds territory, the products made or operations performed, and loss history to the list of factors⁠¹². Penn National’s audit guide also lists total cost (for contractors using subcontractors) and admissions as bases⁠¹⁵.

Two definitions decide how big your exposure is:

• Gross sales: “the gross amount charged by the named insured for all goods/products sold or distributed; operations performed during the policy period; rentals; and dues or fees”. Sales or excise taxes passed to a government, returns, finance and freight charges can be deducted⁠¹⁵.
• Total cost: “the cost of all labor, materials, and equipment furnished, used or delivered” on subcontracted work, including fees⁠¹⁵. Contractors who cannot show subcontractors’ certificates of insurance may be charged for that work at audit⁠¹⁵.

The DC insurance department’s guide illustrates the scale. A toy manufacturer “may pay $3 per $1,000 of sales”, or $30,000 on $10 million of sales, while a lower-risk business such as a florist “may pay $1.50 per $1,000 of sales”⁠¹³. Those are a regulator’s illustrative figures from 2018, not 2026 rates.

Worked example 3: a retail store (our calculation, assumed rate). Estimated sales of $800,000, at a rate of $2.00 per $1,000 assumed purely for the arithmetic:

• $800,000 ÷ 1,000 = 800 units × $2.00 = $1,600 manual premium.
• A 10% schedule credit leaves a $1,440 deposit premium.
• At audit, actual sales were $950,000: 950 × $2.00 × 0.90 = $1,710, so the store owes $270 more.

GL classes, bases and published insurer figures are covered in /coverage/general-liability/.

Commercial auto: per vehicle, with rating factors

Auto is rated vehicle by vehicle. Virginia’s Bureau of Insurance lists the inputs as “the type of vehicles driven, territory, expected mileage, usage, and loss experience”⁠¹². Each vehicle is priced for its type, territory and use, and the coverages and limits you choose apply on top. We found no regulator publication of standard factor values; they come from each insurer’s own rating manual. Business auto and truckers policies can also be audited to confirm which vehicles you operated and how they were used⁠¹². Coverage details are in /coverage/commercial-auto/.

Property: per $100 of insured value, priced on COPE

Property is rated per $100 of insurance: Verisk’s class loss costs are expressed that way⁠¹⁷. Underwriters judge the building by COPE: “construction, occupancy, protection, and exposure”⁠¹⁷.

• Construction: Verisk uses six classes, from Class 1 Frame through Joisted Masonry, Noncombustible, Masonry Noncombustible and Modified Fire Resistive to Class 6 Fire Resistive⁠¹⁶. “Wood-frame buildings offer the least protection from fire”⁠¹⁷.
• Occupancy: the combustibility and damage-susceptibility of what tenants do and store. A restaurant “may call for a fire suppression system”⁠¹⁶⁠¹⁷.
• Protection: the community’s Public Protection Classification, from 1 (“exemplary”) to 10 (does not meet minimum criteria), plus sprinklers and alarms on site⁠¹⁶. California’s regulator lists “sprinklered or non-sprinklered” and the fire protection class among building rating factors⁠¹¹.
• Exposure: neighboring buildings and hazards⁠¹⁷.

Worked example 4: one building (our calculation). Verisk’s brochure shows a class-rated loss cost of $0.133 per $100 of insurance for one building, which its survey-based tool then rated at 1.197 times the class figure⁠¹⁷. Applied to a building insured for $1,000,000:

• $1,000,000 ÷ 100 = 10,000 units × $0.133 = $1,330 class loss cost.
• × 1.197 = $1,592.01 after the building-specific evaluation.
• The insurer then adds its expense and profit loading. With an assumed multiplier of 1.5, the premium before deductible credits is $2,388.02.

See /coverage/commercial-property/ for coinsurance and valuation, which also change the premium.

Professional liability and cyber: revenue, limits and retention

We found no bureau loss costs published for these lines, so the rating factors come from insurers themselves. The Hartford lists the inputs for its professional liability policies as type of business, location (legal costs vary by state), coverage limits “between $250,000 and $2 million”, deductible, number of employees, years in business and claims history⁠¹⁹. For cyber it points to business size (“more revenue, endpoints or vendor connections”), industry and security controls such as multifactor authentication, backups and endpoint detection. Past incidents can lead to “higher pricing and stricter exclusions or may require higher retentions”⁠²⁰. The retention (the cyber term for a deductible) and the limit are pricing choices you control. Revenue and controls are what the insurer measures. Figures are on /coverage/professional-liability/ and /coverage/cyber-liability/.

Experience rating: your own losses against the class average

Experience rating replaces part of the class average with your own record. Under NCCI’s plan, used in 39 jurisdictions, the mod is mandatory for employers that meet a state’s premium eligibility point⁠². It usually compares the latest three available years of payroll and losses with those expected for similar employers. A policy renewing January 1, 2026, uses policies effective from 2022 through 2024, and the most recent year is left out because it is not yet valued⁠².

The formula weights how often you have claims more heavily than how large they are. Each loss is split at a state-approved split point ($18,500 in NCCI’s example). The portion below it is “primary” and weighted more heavily, so ten $5,000 claims hurt more than one $50,000 claim. Medical-only claims enter at 30% of their value⁠². Ohio uses its own rule: the rate is the EM times the base rate, and an employer is experience-rated once expected losses reach $2,000⁠⁶. Washington recalculates each employer’s factor annually⁠¹⁰. The full calculation is in /guides/experience-modification-rate/.

Schedule rating: the underwriter’s adjustment, and its legal limits

Schedule rating lets the underwriter credit or debit features the class rate and experience mod miss. It is capped by bureau plans and state rules:

• Pennsylvania workers’ comp (PCRB plan): each characteristic has its own range. For example, workplace maintenance or operation is −10% to +10%, safety equipment is −5% to +5%, and employee qualifications are −10% to +10%. The total may not exceed −25% or +25% ⁠³. The factor applies “after experience modification … and before carrier premium discounts and expense constants”. Supporting records must be kept while the policy is subject to audit, and the insurer must show you the derivation on request⁠³.
• Florida commercial property and casualty (Rule 69O-170.004, not workers’ comp): schedule rating and similar judgment plans are capped at 25% debit or credit per policy. A policy needs at least $1,000 of manual premium to qualify. The insurer must keep documentation such as inspection reports and safety plans for five years, and the credit carries into renewals unless it is re-justified⁠⁴.

Florida’s rule says concurrent rating plans are multiplicative⁠⁴, and the PCRB plan sets the order⁠³. A 0.90 mod and a 10% schedule credit on Missouri’s $4,215 example give $4,215 × 0.90 × 0.90 = $3,414.15 (our calculation)⁠¹.

Deductibles, limits and minimum premiums

California’s regulator says “the deductible amount you choose will be calculated in the rate. The higher the deductible … the lower the rate”⁠¹¹. Higher limits work in the opposite direction, as The Hartford notes for professional liability⁠¹⁹. Minimum premiums set a floor however small the exposure. Ohio’s $120 charge is an official example⁠⁷. The PCRB plan applies expense constants after schedule rating⁠³.

Taxes, fees and surplus lines

Admitted insurers’ premium taxes are built into the rate: they are one of the costs the LCM covers⁠¹. Surplus lines (non-admitted) policies are different. The tax is added on top and collected by the surplus lines agent. Texas imposes 4.85% of gross premiums ⁠¹⁸, so a $10,000 surplus lines premium carries $485 of tax (our calculation). Surplus lines insurers in Virginia are not required to file their rates⁠¹². In California, a broker must give you a disclosure notice under Insurance Code §1764.1 before placing coverage there⁠¹¹. State workers’ comp assessments can also be added; Ohio’s DWRF line is an example, set at zero for private employers since 2015-2016⁠⁸.

The audit: estimated exposure becomes actual

Texas’s insurance department says most general liability policies are auditable: the premium paid at the start “is a deposit (estimated) premium” based on estimated payroll, sales or units sold. The insurer “is entitled to examine your books and records”, and if the actual figure was higher “you may owe additional premium”; if it was lower “you may be due a return premium”⁠¹⁴. Virginia lists workers’ comp, general liability and commercial vehicle policies as the usual audited lines⁠¹².

Auditors work from payroll records, 941 and state unemployment returns, the general ledger, sales tax returns and subcontractor certificates⁠¹⁵. Two audit rules change the bill most often:

• Payroll splits: some states allow payroll to be split between classes only if records show actual time in each class (“percentages are not accepted”). “Otherwise, the entire payroll is assigned to the highest rated classification”⁠¹⁵.
• Uninsured subcontractors: their cost can be added to your exposure⁠¹⁵.

Worked example 3 above shows a $270 audit bill on a small GL policy. What auditors check and how to dispute a finding are covered in /guides/premium-audits/.

Sources

1. 1
   Missouri Department of Commerce and Insurance, About Loss Cost Multipliers Checked 13 Oct 2026 · Back to text ↑
2. 2
   National Council on Compensation Insurance, ABCs of Experience Rating Checked 13 Oct 2026 · Back to text ↑
3. 3
   Pennsylvania Compensation Rating Bureau, Workers Compensation Manual, Section VII: Schedule Rating Plan Checked 13 Oct 2026 · Back to text ↑
4. 4
   Florida Office of Insurance Regulation (Florida Administrative Code), Rule 69O-170.004, Rating Plans: Discounts, Credits, Surcharges Checked 13 Oct 2026 · Back to text ↑
5. 5
   Ohio Bureau of Workers’ Compensation, Ohio Adm.Code 4123-17-06, Appendix A: base rates effective July 1, 2026 Checked 13 Oct 2026 · Back to text ↑
6. 6
   Ohio Bureau of Workers’ Compensation, Ohio Adm.Code 4123-17-03: experience rating Checked 13 Oct 2026 · Back to text ↑
7. 7
   Ohio Bureau of Workers’ Compensation, Ohio Adm.Code 4123-17-26: minimum annual administrative charge Checked 13 Oct 2026 · Back to text ↑
8. 8
   Ohio Bureau of Workers’ Compensation, Ohio Adm.Code 4123-17-29: Disabled Workers’ Relief Fund assessments Checked 13 Oct 2026 · Back to text ↑
9. 9
   Washington State Department of Labor & Industries, 2026 hourly rates by risk classification and fund Checked 13 Oct 2026 · Back to text ↑
10. 10
    Washington State Department of Labor & Industries, Experience rating Checked 13 Oct 2026 · Back to text ↑
11. 11
    California Department of Insurance, Commercial Insurance Guide Checked 13 Oct 2026 · Back to text ↑
12. 12
    Virginia State Corporation Commission, Bureau of Insurance, Virginia Consumer’s Guide for Commercial Insurance Checked 13 Oct 2026 · Back to text ↑
13. 13
    DC Department of Insurance, Securities and Banking, Introduction to Liability Insurance (consumer guide, 2018) Checked 13 Oct 2026 · Back to text ↑
14. 14
    Texas Department of Insurance, Commercial general liability insurance Checked 13 Oct 2026 · Back to text ↑
15. 15
    Penn National Insurance, Preparing for your premium audit (Q&A) Checked 13 Oct 2026 · Back to text ↑
16. 16
    Verisk, Ten things a commercial property underwriter needs to know Checked 13 Oct 2026 · Back to text ↑
17. 17
    Verisk, Class Insight: Commercial Property (brochure) Checked 13 Oct 2026 · Back to text ↑
18. 18
    Texas Legislature, Texas Insurance Code, Chapter 225: Surplus Lines Insurance Premium Tax Checked 13 Oct 2026 · Back to text ↑
19. 19
    The Hartford, How much does professional liability insurance cost? Checked 13 Oct 2026 · Back to text ↑
20. 20
    The Hartford, How much does cyber insurance cost? Checked 13 Oct 2026 · Back to text ↑
21. 21
    Washington State Department of Labor & Industries, Calculating premium rates Checked 13 Oct 2026 · Back to text ↑

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