Pricing
How your premium is generated.
≈ 3 MIN READ
A commercial insurance premium can feel like a number that arrives from nowhere. It isn't. There's a formula behind it, and once you've seen it, you can reason about your own pricing — and spot when something's off.
Step one: classification
Every industry has classifications. A framing contractor, a plumber, a software company, and a trucking firm each map to specific class codes that describe what the business actually does. Those codes exist because an HVAC contractor and an accounting office don't present remotely similar risk, and the system needs a way to say so. Most businesses carry more than one code — a contractor might have field classifications for the work itself and separate codes for office staff.
Step two: codes carry rates
Each class code is tied to a rate. Rates reflect the loss experience of everyone in that classification — how often businesses like yours have claims, and how expensive those claims tend to be. Riskier codes carry higher rates; that's the entire logic. Carriers file and adjust these rates, and different carriers can rate the same code differently depending on their appetite and their own claims data.
Step three: rates are applied to your exposure
A rate by itself isn't a premium. It gets applied to an exposure base — the measurement of how much of the risky activity you actually do. Depending on the line of coverage, that's usually:
- Payroll — the dominant base for workers compensation and much of general liability. More payroll in a class means more of that work being performed.
- Sales — common for GL on many operations; revenue approximates activity.
- Subcontractor costs — what you pay subs can be charged into your GL exposure, especially when subs are uninsured or you can't produce their certificates.
Rates are typically expressed per $100 or per $1,000 of exposure. Simplified: classification → rate × your exposure = base premium.
Step four: the modifiers
The base premium then gets adjusted. Your experience mod (on workers comp) raises or lowers it based on your own loss history versus your peers. Schedule credits and debits reflect underwriter judgment about your specific operation — safety programs, years in business, management quality. Minimum premiums, carrier appetite, and market conditions all push the final number around.
Why this matters to you
Two practical consequences. First, classification accuracy is money — payroll assigned to the wrong code can price part of your operation at the wrong rate, in either direction. Second, your premium is an estimate until it isn't: policies are issued on projected payroll and sales, then trued-up at audit. If you understand the formula, the audit makes sense — and so does the case for keeping clean records. If you'd like your own program walked through code by code, that's a conversation we're glad to have.
This article is general information, not advice about your specific policy, and not a quote, binder, or contract of insurance. Rating methods vary by carrier, line, and state.