Updated: Dec 26, 2022
I wrote a blog post titled What Is A Good Experience Modification Rate? It explains why a good, below 1.00, Experience Modification Rate is an even better achievement than most people realize.
In this post, I'm using much of the same material related to EMR calculations to explain why your debit Experience Modification Rate isn't necessarily as bad as you think. And, I want to explain why there might be a good opportunity to realize a big impact from relatively small changes in safety practices, claims management, etc.
Why Is An Experience Modification Rating Over 1.00 Bad?
If your Experience Modification Rate is over a 1.00, this could spell trouble for you in a number of ways. The 2 most prominent are:
Lost Revenue (not eligible to bid on projects)
There are plenty more.
Although your Workers Compensation Experience Modification Rate may be causing you problems in the here and now, you are likely in position to improve it faster than you think. In the process you can save yourself money and position yourself more competitively when submitting your EMR is required for new business proposals, RFPs, etc.
Experience Modification Ratings Are Like Golf; The Lower The Better
The lower your EMR the better just like your golf score.
Also, like golf, when you are not very good you get better quickly with small improvements in technique, small commitments to regular practice, playing more frequently, etc.
Conversely, as you improve from shooting regularly in the 90s to the 80s to the 70s (not there yet by a long shot!), it becomes increasingly difficult to improve. Exponentially more practice and training are required to improve your scores the better you become.
Your Experience Modification Rating Decelerates Away From The Mean (Average 1.00)
Remember the Normal Distribution or Bell Curve from statistics? The high point of the curve represents the mean with a strong concentration of data points clustered around the mean.
The IQ distribution, for example, is a Bell curve and the mean is 100.
Experience Modification Rating has a mean of 1.
For example, the gulf in brain power between a 135 and a 130 IQ is not nearly the difference in brain power as that between 140 and 135. Every IQ point higher is increasingly more difficult to achieve than the previous point.
In terms of Experience Modification Rates, a .90 isn’t 10% better than a 1.00. It’s something more. A .80 is not simply another 10% better than the .90. It’s definitely better than that.
Likewise, an EMR of 1.10 isn't simply 10% worse than a 1.00. It's something more. A 1.20 isn't twice as bad as a 1.10. It's definitely worse than that.
But, Experience Modification Ratings Accelerate Toward The Mean (1.00).
An important thing to remember is that in this type of distribution it becomes more and more difficult to diverge from the mean; and increasingly easier to converge on the mean.
Good News: Experience Modification Ratings Aren't Fixed Like An IQ
And, improvements in you loss experience will increasingly accelerate the improvement of your EMR the farther away from the mean you are (to the right - over a 1.00). This acceleration will continue up until the point where you arrive at the 1.00 mean.
In other words, consider whatever increased safety efforts that reduce your claim frequency by, say, 5 claims per year. Or, alternatively, efforts that reduce your total claims cost by $15,000 per year. Those identical changes will reduce your Experience Modification MORE if you have a 1.05 EMR rather than a 1.10.
If you have a 1.10 Experience Modification rate, those identical changes (improvements) in loss performance will benefit you (lower your EMR) more than someone with a 1.20.
Again, this will be true up until the point where you start falling below a 1.00 where, for each additional point drop, it becomes increasingly difficult to lower your EMR.
Now, I believe Experience Modification Rating fall into a log normal distribution rather than a normal distribution because the lowest Experience Modification Rates I’ve seen are around a .5 while the highest I've seen are north of 2.00.
One way or another though, reducing your Experience Modification Rate becomes exponentially easier the closer to the mean, 1.00, you go (from right to left).
So, Are There Any Exceptions For Some Experience Modification Ratings?
Yes, if your Experience Modification Rate is really bad. There are some safeguards built into the Experience Rating Algorithm to prevent EMRs from rising to, for example, a 10.00. One is the Claim Max or State Max. Each state has it's own severity limit for an individual claim. It may be $350,000 in your state which would mean that any amount above "the max" can't be counted in your Experience Modification Rate.
So, in the case of a $1,000,000 claim only $350,000 would count against you while the remaining $650,000 would not.
There are other "triggers" like this that limit catastrophic rises in EMRs beyond the scope of this post. But, let me know if you're interested in more.
If you are an employer with a really high Experience Modification Rate benefiting from some of these safeguards, your claims performance is going to have to improve to a large extent before your mod will fall at all.
For example, if the reserves on that million-dollar claim example above are reduced by $500,000, your EMR won't benefit at all since the claim is still valued above the State Max. The claim value was capped at $350,000 and it's still valued at $500,000 after the reserves were taken down. That claim would have to still fall below $350,000 before you could realize any benefit.
Getting Back To The Original Question: Is Your "Bad" Experience Modification Rate Really That Bad?
It's probably not that bad in the sense that a relatively small effort and focus should get your EMR back to where it's not costing you additional premium and working for you (rather than against) in bidding processes.
I wrote a post with suggestions that should help you get started, build some momentum and reduce your Experience Modification Rate. These are no-cost or little cost techniques you can implement without taking time away from what you do best. And, we know how building a little momentum can snowball!
If you want to lay out a comprehensive plan to attack your EMR, let me know.
Lastly, It May Help To Turn Your Experience Modification Rating into dollars and cents.
Sometimes improving your Experience Modification Rate just takes "buy in" from management or even your colleagues to get the support for your plan.
Your best bet may be to demonstrate how much your Experience Modification Rate is costing your company. To do this you:
Calculate your "minimum mod" (what your mod is with zero claims)
Substitute it on your policy for your current mod and figure out the annual premium with your minimum mod
Subtract premium with your minimum mod from what you're currently paying
The difference in premium between the two is what your Experience Modification Rate is costing you. And that dollar figure is called your Controllable Premium. If your controllable premium is significant enough, you should be able to get the attention you need for an investment in time and resources to put some measures in place.
If you want help determining your minimum mod and controllable premium, let me know. I’d be happy to do the calculations for you, no fee.
Stuart Cytron, MBA has been published in trade journals such Construction Forum St. Louis and St. Louis Business Journal among others. You can read more about Stuart and how he developed a passion for helping businesses reduce work comp expenses on his website.