The experience modification rating (EMR) is the single aspect of the calculation used to determine your workers’ compensation insurance premium over which you have control. It can have a dramatic impact on the cost of work comp coverage. By understanding the EMR and how it works, you will have a better chance at managing it and keeping your workers’ comp insurance costs in line.
What is an Experience Modification Rating
The experience modification rating is a multiplier based on an employer’s past losses and payroll history, where 1.0 equates to an average history of claims based on payroll within an industry. An EMR under 1.0 represents above-average performance and EMRs above 1.0 represent poorer than average performance. In a sense, it is a performance measurement of a company’s safety and claims management program.
Experience modification ratings do not go down to zero because every job/class code is expected to have some losses. Knowing your minimum modification rating can be helpful when setting experience mod reduction goals to ensure they are reasonable and achievable.
Pricing Your Insurance Premiums
To arrive at your workers’ compensation insurance premium, the insurance carrier starts with a pure premium amount, which is based on your payroll (by job classification) and industry. That amount is multiplied by your experience modification rating and schedule credits or debits (another multiplier that is controlled by the underwriters). So a $100,000 pure premium could easily turn into something significantly higher or lower based upon your experience modifier and credits.
The experience modification rating is really the only aspect of the premium assessed by the workers’ compensation carrier that you control. The carrier sets the rates (pure premiums) and assigns credits or debits based on how good or bad they believe your company will perform and how badly they want your business. But the experience mod is based solely on your past performance relative to your industry.
Calculating Experience Modification Ratings
Experience modification ratings are set by independent organizations; in Minnesota that organization is the Minnesota Workers’ Compensation Insurers Association, Inc. (MWCIA). The MWCIA is a nonprofit licensed by the State of Minnesota Department of Commerce to collect workers’ compensation data and calculate experience modification ratings.
The National Council on Compensation Insurance (NCCI) is a similar organization operating on a nationwide level. Employers operating in states under the NCCI’s jurisdiction or with workers’ compensation exposures in multiple states will have their experience modification ratings calculated by the NCCI.
The experience modification rating is created six months prior to your workers’ compensation policy renewal date. At that time, your insurance carrier submits a Unit Stat Card, which lists all losses within the past three policy years, to the rating bureau. The losses include paid and reserved amounts of your claims.
When setting your EMR, the rating bureau uses the following information:
- Actual Incurred Losses – These include the paid and reserved dollars of all claims within the three-year rating period, not including the current policy year.
- Expected Losses – These are the losses that a company is expected to have based on their business type (class code) and size (payroll).
- Primary Actual & Expected Losses – The total dollar amount of all claims incurred under $13,500, the current split point. These dollars are weighted more significantly because loss frequency breeds loss severity. For example, studies show that for every 10 lacerations, one will likely involve tendon damage.
- Excess Actual & Expected Losses – The total dollar amount of claims incurred over $13,500 (the split point). These dollars are weighted less significantly than the Primary Losses.
The above data is entered into a formula and affected by the following factors:
- Expected Loss Rate (ELR) – This value determines the assumed amount of losses by class code and is used to calculate your expected losses.
- D-ratio Discounts - This is the ratio of primary expected losses plus a discounted value of large losses to the total expected losses. It is used to calculate the expected primary losses for classification codes, and is multiplied by the expected losses for the class code. The resulting number is the expected primary loss for that class code.
- Weight Factor – This is a percentage of Actual Losses, and used to increase the impact of primary losses.
- Ballast Factor – This is a stabilizing element that limits the modification fluctuation and draws the extremes closer to the middle.
In conclusion, it is not so important to understand all the factors of the experience modification rating calculation. It is critical, however, to know that losses directly affect your experience modification rating, which directly affects your workers’ compensation insurance premiums. Effective loss prevention and claim management strategies can make a significant impact on your workers’ comp costs.
Marsh & McLennan Agency has teams that specialize in all areas of integrated risk management and loss prevention that include proven pre-loss and post-loss techniques and strategies.