What Is An Experience Modification Rate?

Below is a discussion of:

  • What is an Experience Modification Rate

  • The calculation of an Experience Modification Rate

  • How do insurance companies use an Experience Modification Rate


An Experience Modification Rate is a critical measurement of your organization's workers' compensation claims experience (past injuries) compared to your industry in the particular states where you operate.  Not only can this safety metric dramatically alter workers’ compensation premiums paid to your insurance carrier, but also impact your ability to win jobs and produce revenue


The average Experience Modification Rate is a 1.00.  Half of all business should be above a 1.00 (this is worse than average) while the other half below a 1.00 (better than average).

Simply put your Experience Modification Rate = Actual Losses / Expected Losses  |  See the worksheet example below .94 = 469,249 / 500,816











​The Calculation Of An Experience Modification Rate - Acutal Losses


Although the idea of how an Experience Modification Rate is determined (Actual Losses / Expected Losses) is very simple, the calculation of an Experience Modification Rate is actually very technical.  In the example above the final Actual Loss figure, $469,248,  won't be found anywhere on the company's loss run.  That figure, the true actual total incurred loss, is in "Box H," and is $335,752.  

The Experience Rating "Algorithm" is actuarially determined.  There are numerous adjustments within the formula to, for instance, prevent wild swings in the rating from one year to the next.  There are also adjustments to give more or less credibility to large losses depending on the size of a firm.  The data from large firms that have lots of employees and a correspondingly large number of claims have more predictive value and, as a result, better credibility.  Predicting the likelihood of claims in small businesses is more difficult. Also, for a small business that does incur a large loss, the effect on its experience modification using a straightforward ratio of actual losses to expected losses could result in an unreasonably high experience modification for up to three years.  


There are numerous other issues like how to account for severity of incurred claims vs frequency.  I did a blog post you can read on claim frequency and how it affects your Experience Modification Rate.  Know that both claim frequency (how many claims you have) and claim severity both impact your Experience Mod.


​The Calculation Of An Experience Modification Rate - Expected Losses

Of course, you would expect businesses within the same industry (say electrical contractors) to have varying numbers of claims annually depending on their size.  But, how do you make an apples to apples comparison between the claims experience of businesses with $100 million, $10 million or $500K in payroll?

The rating bureaus that promulgate Experience Modification Rates calculate (by state and by industry) how much money is paid for workers’ compensation claims for every $100 of payroll.  In this manner you can compare organizations of various sizes.  As previously stated, if you generate more claims payments per $100 of payroll than your industry, on average, you will receive a “debit mod” (greater than 1.00).  If you generate less claims payments per $100 of payroll than average, you’ll receive a credit mod (less than 1.00).

As you'd expect, this video by NCCI is very well done.  Watch this video which covers that basics, and, below, I'll add a few things that I think you should know while trying to develop an understanding of Experience Mods.


One thing to keep in mind is that your experience mod is a 3 year moving average of your claims experience versus your industry beginning 4 policies ago.  So, assume you renewed on January 1st of this year.  Last year's policy experience will not be in your current experience mod, but the 3 prior years will be included (assuming you've been in business that long).  This is intentional so that one bad year doesn't ruin your experience mod and drive your premiums through the roof.  Likewise, it'll take more than 1 good year to turn around a track record of poor claims experience.

How Do Insurance Companies Use An Experience Modification Rate?

The Experience Modification Factor is used to predict future losses based on past experience.  So, "Modification" in Experience Modification Rate refers to this number's use by insurance carriers to modify your premiums to adjust your premiums to properly price your work comp policy for anticipated losses.  If you are doing a great job controlling claims and receive an Experience Modification Factor of .80, your work comp carrier will multiply your "mod" by something called your Manual Premium and you will receive a 20% discount. 


If you are not doing such a great job controlling your claims expenses and, instead, receive a 1.20 Experience Modification Factor, your work comp carrier will multiply your mod by your Manual Premium and you will pay 20% additional premium.

Experience Modification Rates can be managed and lowered; significantly!  There are various actions you can take that can impact your Experience Mod in the near, intermediate, and long term.  Please get in touch with us when you are ready  to take charge of your Experience Modification Rate.


Stuart Cytron



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