Property & Casualty Insights
Why Workers' Compensation Costs Are More Controllable Than Many Employers Think
OCTOBER 6, 2026
Many employers treat workers' compensation as a renewal-cycle expense they simply have to absorb. But that perception misses an important point: it's one of the few major insurance lines where better internal data can directly lower the price.
NCCI's 2026 "State of the Line" report found claim severity climbing even as frequency declined. Medical and indemnity severity each grew 4% in 2025, while construction severity increased 13%. In other words, claims may be happening less often, but they are costing more when they occur.
That makes accurate data and active claims oversight more important than ever. Employers may not be able to control every claim, but they can control the inputs that shape premiums: payroll, classifications, and experience modification factor (e-mod) accuracy.
The Importance of Accurate Payroll Reporting
Payroll is the foundation of every premium calculation. Because rates are applied per $100 of payroll within each classification, even small errors can inflate premiums — and those miscalculations may go undetected for years.
Common issues include executive payroll reported above state caps, wages assigned to the wrong class codes, and outdated payroll estimates that undermine budgeting accuracy. Overtime and bonus reporting errors can create similar problems. In one review, executive payroll had been mistakenly included above the state's cap; correcting the error produced an $18,000 refund.
Why Class Code Accuracy Matters
Every job function is assigned a classification code reflecting its relative risk, and that code is a primary driver of premium. When low-risk jobs are coded too high, employers may overpay. When high-risk jobs are coded too low, organizations may face coverage issues.
The financial impact can be significant. Misclassification can inflate costs by 10% to 30%, while a proper review can reduce premiums by up to 30%. Because class codes feed e-mod calculations, an error can distort several years of pricing. For construction companies, it can even jeopardize the ability to bid on new contracts.
Classification issues often appear after a business change. For example, a carpentry company was still coded under a high-risk "all operations" classification even though most of its work had been moved into a shop setting. A review found that 80% of the work belonged in a lower-risk category, producing 15% savings from reclassification alone and 22% total savings in the first year.
The Value of Regular E-Mod Reviews
The e-mod is a multiplier that compares a company's loss history with industry averages for similarly classified businesses. An e-mod of 1.00 reflects average losses; a score below 1.00 can lower the premium, while a score above 1.00 can increase it.
In construction and similar industries, the impact can go beyond insurance costs. An e-mod above 1.0 can disqualify a company from bidding on certain contracts.
E-mod calculations depend on accurate payroll, class codes, and claim data. If any one of those inputs is wrong, the factor can be overstated for multiple years. This is why annual reviews matter. They often uncover issues such as overstated reserves, payroll misreporting, or worksheet errors; correcting them has helped businesses cut premiums by 5% to 20%.
In one instance, a general contractor's e-mod of 1.13 was preventing the company from bidding on contracts that required a lower score. After payroll errors and an overstated reserve were corrected, the e-mod dropped to 0.98 — restoring the company’s ability to compete for new work.
Many businesses stop at one question: "Is my e-mod below 1.00?" A better question is, “How much lower could it be?” The difference between a company's current e-mod and its calculable minimum mod shows how much savings potential remains — a number few companies calculate on their own.
Additional Cost-Control Strategies
Accurate data helps determine what employers pay upfront. These additional strategies can help control costs after an injury occurs:
Active oversight of open claims — verifying reserve accuracy, tracking treatment plans, and engaging early with adjusters — can prevent claims from lingering or costing more than necessary.
Getting injured employees into modified or transitional duty pays off: one widely cited study found participants recovered roughly three times faster, with employers saving up to 70% in claims costs.
Fewer injuries mean fewer claims and a stronger e-mod over time. OSHA has cited CFO surveys in which more than 60% reported that every $1 invested in injury prevention returned $2 or more.
Conclusion
Workers' compensation is often treated as an unavoidable cost of doing business. In reality, it's one of the more data-driven, controllable expenses on a company's income statement. The key is consistent oversight. Accurate class codes improve e-mod accuracy, well-managed claims can improve next year's e-mod, and a lower e-mod can reduce premium and strengthen bidding competitiveness.
With regular review, employers can turn workers’ compensation from an unpredictable line item into a more manageable and measurable cost.
How USI Can Help
USI helps organizations reduce costs and risk through strategic insurance reviews, including job classification audits. These reviews have helped clients save up to 30% on premiums.
Our team can identify and correct misclassifications, secure refunds for overpayments, and negotiate better carrier rates based on accurate data. Ready to take a closer look? Contact your USI consultant or email pcinquiries@usi.com.
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