Payroll May Overstate Expected Losses for High-Wage Workers, NCCI Research Finds

Workers’ compensation premiums calculated on unlimited payroll may not accurately reflect the expected losses of employers whose workforces skew toward higher wages, suggests new research from the National Council on Compensation Insurance.

The research brief, which analyzes both indemnity and medical claim data, found that loss ratios decline as worker wage levels rise, driven primarily by falling claim frequency at higher wage tiers. Employers with better-paid employees may be paying more in workers’ compensation premium than their expected losses would justify, the NCCI said.

“Payroll continues to function effectively as an exposure base because of its practicality, transparency, and consistent application across a wide range of employers,” the NCCI wrote. “At the same time, this paper shows that payroll’s relationship to aggregate loss experience is not consistently uniform across all wage levels and presents objective patterns in how loss dynamics change across wage tiers.”

Severity Rises With Wages, but Not at the Same Rate

NCCI found that total claim severity, combining indemnity and medical costs, generally increases as injured worker wages increase, but at a slower pace than wages themselves. On average, moving up one 25-percentage-point wage tier corresponds to roughly a 15% increase in combined severity, the research found.

Indemnity severity tracks wages reasonably well at lower wage levels, but begins to plateau for workers earning more than 150% of the state average weekly wage. NCCI attributed part of this effect to statutory benefit maximums, which cap indemnity payments regardless of earnings, though the organization noted that a single benefit cap does not capture the full complexity of each state’s benefit framework. Just 7% of injured worker wages reported to NCCI fall above the 150% threshold, limiting the available data at those tiers.

Medical severity also rises with wages, but more gradually than indemnity: roughly a 10% increase per wage tier compared with about 21% for indemnity. Because medical benefits have no direct tie to worker earnings, NCCI explored several possible explanations, including differences in job complexity, worker behavior, and age.

The analysis found that while medical severity does increase with worker age, it does so across all wage levels, suggesting factors beyond age are driving the relationship.

Frequency Falls as Wages Climb

While severity moves in the same direction as wages, claim frequency moves in the opposite direction.

NCCI found that average claim frequency declines across wage tiers for all industries combined. The organization pointed to several contributing factors: higher-paid workers tend to have more tenure, and previous NCCI research found that short-tenured workers are “close to twice as likely to suffer work injuries than full-tenured workers.” Higher wages may also reflect transitions into supervisory or less physically demanding roles, reducing occupational risk.

Because manual premium rises directly with payroll, stable or declining claim counts translate into lower observed frequency at higher wage levels. The pattern held broadly across industries, though Leisure & Hospitality and Transportation & Warehousing showed increasing frequency across some wage tiers, the report noted.

The combined effect is a declining loss ratio as wages rise. NCCI noted that frequency is the primary driver of this decline, with severity providing only a partial offset, particularly at lower wage tiers.

Alternative Approaches and Their Tradeoffs

NCCI’s analysis points to limited payroll as one potential refinement for class codes where wages significantly exceed the level at which losses continue to scale with compensation. A payroll cap would shift emphasis away from how much employees earn and toward how many are employed, giving claim frequency greater influence in premium calculations.

California has implemented payroll caps for select class codes, and Washington’s state fund uses hours worked as the exposure base. NCCI already caps payroll for executive officers, sole proprietors, and athletes to prevent distortions in loss costs.

However, NCCI cautioned that payroll caps carry tradeoffs. A cap redistributes premium within a class code, reducing the share borne by higher-wage employers while increasing it for lower-wage employers. Applied too broadly or at an inappropriate level, that redistribution could raise equity concerns, NCCI said.

The organization also noted that experience rating modifications provide a partial mitigating effect, since a risk whose higher wages do not translate into higher claim costs would tend to develop a lower mod, better aligning premium with losses.

NCCI emphasized that the findings reflect aggregate patterns, and the relationship between wages and expected losses can vary materially by state, industry, and individual class code.

Obtain the full report here. &