What Is 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).

Experience Modification Rate Topics Covered:

  • How Is An Experience Modification Rate Calculated

  • How Do Insurance Companies Use Experience Modification Rates

  • Why Your Experience Modification Rate Is Important

  • How To Improve Your Experience Modification Rate

How Is An Experience Modification Rate Calculated - Actual Losses

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

How Is An Experience Modification Rate Calculated

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.

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.

How Is An Experience Modification Rate Calculated - Expected Losses

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.  

 

Every year, a new year's compilation of claims, payroll and classification data is added to the three year "window" of experience used in the calculation.  And, the oldest year from the prior calculation drops out. The other two years worth of data remain in the rating window and updated as necessary from the prior year.

As an example, 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 (the 3 years' worth of experience) 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!  Even if you think it's hopeless or too time consuming to tackle, it's probably easier than you think.  And certainly much less expensive and time consuming than you imagine to reduce your Experience Modification Rate.

 

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.

  

Why The Experience Modification Rate Is Important

 

Your Experience Modification Factor is not just a driver of workers' compensation costs.  It can also an important driver revenue.  More specifically, it can be a problem that increases expenses and/or decreases your revenue.

  • How Experience Modification Rates Can Win Or Lose You Business

There are many industries in which the submission of NCCI Experience Modification Worksheets for new business proposals and contract renewals is common.  Construction is one which comes to mind first for most people.

 

If you are, say, an electrical contractor and you are bidding on a project to construct a new apartment building, you are going to have to include your Experience Modification Rate with your proposal.

 

The developer and/or the general contractor will have a predetermined EMR rate above which they won't hire any subcontractors.  Normally, that figure is a 1.00 which is the average Experience Modification Rate.  So, if your Emod is a 1.01 or worse (higher), you don't get the work no matter how competitive the rest of your proposal is compared to the other electrical contractors.  If a .99 or lower, you've cleared one of the hurdles to winning the business.

 

The idea is that organizations with poor safety records and more frequent accidents can end up costing the project money, time and plenty of other headaches.  The practice is frowned upon by some although it has existed for a very long time; and it's pervasive.   We have a couple blog posts on the subject:

Use And Misuse Of Experience Modification Rates As Qualifiers For New Business

Part 2:  Use And Misuse Of Experience Modification Rates As Qualifiers For New Business

 

No matter how you feel about the subject you have to keep your eye on your Experience Modification Rate if you serve one of the industries, like construction, where it is customary to submit emods with new business proposals. 

 

And, if you're experience modification rate is causing you trouble or in danger of causing you trouble, let's talk.

​Are you involved in Construction?  Office Cleaning?  Transportation?  Or, serve large corporations with Vendor Insurance Management Programs?  If you do work for or aspire to perform work for these types of businesses, you will need an experience modification rate factor below a certain threshold to win the business and retain it annually.

Make sure your experience modification rating is accurate and avoid not only losing money, but also losing opportunities that may be on the horizon for your firm.

  • How Your Experience Modification Rate Can Cost You Even More Premium

Everyone understands that the higher their experience modification rating, the higher their premiums.  If your EMR is overstated due to your carrier misreporting data or not following NCCI rules or state regulations, then you are paying too much. 

 

There are numerous examples of how these errors multiply their harmful effects. 

One example I like to use, being located in St. Louis across the river from Illinois, is the Illinois Contractor's Credit Premium Adjustment Program.  Illinois has a special rule that requires a mod below 1.00 to qualify for these lucrative credits.  Well, we've had clients in IL whose EMR we've reduced from above a 1.00 to below a 1.00.  As a result, these customers restored 2 credits to their policies when, prior to these corrections, their carriers were "double dipping" from 1 original error!

  • How Your Experience Modification Rate Can Increase Your Rates

If you haven't had an expert review your Experience Rating, how can you know that your broker found the best possible rates from among the carriers with whom he/she does business?

Underwriters have various guidelines for writing business; experience mod, lines of business, class code, premium size, credit history, etc.  They all come into play.  But, rest assured, experience rating level IS one of those guidelines.

​Some of the underwriters and carriers with whom your broker does business could have easily declined to quote your business based on your EMR.  And, you might never know about it.

How To Improve The Experience Modification Rate

As stated above the Experience Modification Rate can be managed and reduced.  And, as I detailed in a blog post, small improvements accelerate the reduction of your debit EMR (over a 1.00) toward a 1.00.  This has to do with the fact that an Experience Modification Rate is a not an average but, rather a distribution like the Bell Curve from statistics. 

You can read more about this in the linked blog post.  But, keep in mind that as you take small steps to improve your Experience Modification Rate you will build momentum and accelerate the descent of your EMR toward a 1.00.

The suggestions below are meant to provide you tools that deliver the quickest and easiest results.  Upgrades to your overall safety management program help create lasting success but won't begin to impact your Experience Modification Rate until 2 renewals from when you initiate your upgrades.  And, these upgrades won't fully reveal their benefit to your Experience Modification Rate until 4 renewals from now.

  • Independent Audit To Reduce Your Current And Prior Experience Modification Rates

Independent audits can have an immediate impact on your current (and prior) Experience Modification Rates.  This is really important for clients who are faced with rising premiums and a tough renewal.  Also, maybe more urgent, some may losing revenue with EMRs over a 1.00 because their relatively high Experience Modification Rate is preventing them from bidding on work.

 

An experience modification rate contains a lot of data; claims, payroll, and classification codes.  There are NCCI manual rules, Independent Rating Bureau manual rules, and state regulations that all impact and possibly change how data is to be reported.  And, there are all kinds of special circumstances, like acquisitions or sales of businesses and divisions, that further complicate manual rules and regs. It really does take an expert to properly review an experience mod.

 

Due to the fact that our success in identifying errors in Experience Modification Rate calculations is so frequent, we do not charge for our time.  Only results.  Not only is an audit the fastest way to obtain Experience Modification Rate improvement, but it is also the most cost effective.

  • Reserve Audit To Reduce Your Current And Future Experience Modification Rates

Reserve auditing is an important way to proactively manage your current and upcoming Experience Modification Rates.  The goal of a reserve audit is to identify open claims with reserves that appear suspiciously high and negotiate more favorable reserves.

 

If successful negotiating lower reserves, you may be able to reduce your current Experience Modification Rate and you will decrease your upcoming Experience Mod; directly reducing the cost of your renewal premiums.

 

Reserve auditing is something that requires claims handling expertise.  Cytron Group LLC can definitely perform a reserve audit for you.  Depending on your brokerage firms' claims advocates and their backgrounds, you might be able to have them perform this for you.  But, if you want to guarantee yourself a robust, comprehensive claims reserve audit, don't take any chances and engage an expert.  Click on the "Reserve Auditing" link above for more details.

  • Injury Triage Service To Reduce Future Experience Modification Rates

Implementation of an Injury Triage program will help you reduce your Experience Modification Rate 2 renewals from now.  And, Injury Triage is an inexpensive service that almost always returns an impressive ROI.

The Benefits that Telephonic Injury Triage customers enjoy include:

·       Reduced Claims

·       Reduced Costs

·       Reduced Litigation  

·       Reduced Experience Modification Rates

 

Without going into too much detail here, Injury Triage is a preclaim service to help employers make good decisions about what to do when one of their employees gets hurt. It is beneficial for any injury that is neither an obvious band-aid/self-care incident nor an obvious emergency requiring an ambulance.

 

The benefits include reduced number of claims and appropriately guiding injuries that do require medical attention to the proper level of care (e.g. clinic vs emergency room).

  • Workplace Safety Programs To Reduce Future Experience Modification Rates

Introducing new safety programs or making existing programs more robust is a sure way to reduce future Experience Modification Rates and keep them low.   Not only do safety programs reduce EMRs, workplace hazards, and employee injuries, but also help improve employee morale and sense of wellbeing.

Employee safety programs have been documented by OSHA to reduce claims expenses and employee illness by up to 40%.  A company that has an effective workplace safety program in place can help lower their EMR rate. Workplace safety programs help to eliminate workplace hazards and reduce employee injuries and accidents. The Occupational Safety and Health Administration (OSHA) shows that employers who establish employee safety programs can reduce costs related to injury and workplace illness by up to 40%. Businesses who implement a return to work program could also see their EMR reduced.  Feeling safe at work can also improve loyalty to the employer.

One thing to remember is that the claims and payroll "experience" from your current policy period is not included in your upcoming, renewal NCCI Experience Modification Rate.  Not until the following Experience Mod will the current term appear for the first time.  So, any action you take now toward improving safety won't begin to positively impact your Experience Modification Rate until 2 renewals from now.  

Stuart Cytron

stuart@cytrongroup.com

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(314) 757-8079 t