Since our last update:
- The National Council on Compensation Insurance (NCCI) has decided to exclude COVID-19 claims from businesses’ experience modification rates.
- States that don’t use the NCCI may have other rules. These include California, Delaware, Indiana, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, North Dakota, Ohio, Pennsylvania, Texas, Washington, Wisconsin, Wyoming, and the District of Columbia. Business owners in these states should check with their state boards.
An experience modification rate (EMR) is a multiplier insurance companies use to help set workers’ compensation premiums. Your business’s rate is determined by looking at your workers’ comp claims history and potential for future injuries. Businesses with lower EMRs pay less for their workers’ compensation insurance. EMRs commonly range between 0.75 and 1.25.
How the Experience Modification Rate Works
Your EMR compares your losses to what’s expected in your industry. The formula for determining your EMR is complex, but essentially, it increases if you have more claims than similar businesses and decreases if you have fewer. For example, electricians face a high rate of injury, but as long as their injuries aren’t more frequent or more severe than other electricians in the state, their EMRs should remain close to 1.0.
Once insurers know your EMR, they plug it into an equation to determine your workers’ compensation premium.
The formula starts with a class code rate, which is the amount you’re charged based on how much risk you and your employees face on the job. Most states use job classification codes based on the ones created by the National Council of Compensation Insurance (NCCI), but some states have their own system. Your class code is then multiplied by your experience modification rate and by your payroll costs divided by $100 to determine your ultimate workers’ comp costs.
How the Experience Modification Rate Affects Workers’ Comp Costs
Your experience modification rate impacts your workers’ comp costs because it’s a multiplier that’s applied to your base rate. When your base rate is multiplied by an EMR higher than 1.0, your costs increase. If your EMR is lower than 1.0, your workers’ comp costs go down.
If your business had more workers’ compensation claims than the industry norm last year, you should expect your EMR and your costs to go up accordingly. For example, let’s say you originally paid $100 per employee, per year for your workers’ compensation, but those claims caused your EMR to go from 1.0 to 1.2. Now, your annual per-worker cost is $120 (1.2 EMR x $100 class rate = $120).
Your experience modification rate may go up if you have several workers’ comp claims or a single expensive one like a worker who needs back surgery and was out for months. However, the rating formula most states use places greater emphasis on frequency over severity. The idea is that one severe loss may represent a freak accident, but more injuries over time may indicate poor safety protocols.
New Employers vs Existing Employers
New employers are usually assigned an experience modification rate of 1.0. That means, in essence, that class code rate isn’t modified, and the EMR has no effect. Once employers have three years of claims history, most states adjust the business’s EMR, which means their workers’ comp premium will probably change.
For instance, if you have few and infrequent claims, you’ll most likely pay lower workers’ comp rates. But the opposite is also true. If your workers’ compensation claims are more frequent, more serious, or more costly than what’s typical in your industry, you may find your EMR goes above 1.0, resulting in higher premiums.
9 Factors Affecting Workers’ Comp Experience Rating
Specific details about your claims history, such as the type and number of claims, have the biggest impact on your experience rating. However, other factors, like state laws and industry expectations, can change it, too. Below is a list of nine factors that most carriers consider when calculating your workers’ compensation premium.
- Number of claims: Experience ratings rise above or fall below 1.0, depending on the number of claims you have.
- Claims costs: Most states consider small claims that cost less than your deductible when determining the EMR; additionally, medical-only claims have a limited impact on EMR.
- Claims frequency: Multiple claims, even small ones, can have a negative effect on your experience modification rate.
- Claims severity: While most states place a greater weight on frequency, one huge claim can still increase your experience rating.
- Open vs closed claims: Usually only closed claims impact your EMR; however, getting claims filed and closed quickly means lower claims cost and, ultimately, less impact on your experience rating.
- Expectations for industry: Your EMR compares your claims history against what other businesses in your industry experience.
- Years in business: New businesses operating for three years or fewer generally start with an experience modification rate of 1.0.
- State minimums: Some states only apply an experience rating to certain employers. For example, Oregon businesses qualify for an EMR if they’ve paid workers’ comp premiums of $2,500 for two years, or $5,000 for one year.
- Employer size: Larger employers often receive experience modifiers based on their own company’s claims experience without incorporating state average losses.
How Long Do Claims Affect Experience Ratings?
Insurance companies work on a three- to four-year rolling claims cycle, meaning claims stay with policies from year to year and typically fall off in year four. New claims are incorporated into the claims cycle as they occur. A company that is completely claims-free for three years typically sees experience modification rate reductions.
“Claims affect the e-mod for three years after the claim is closed. This is why it is essential for employers to promptly report claims to their workers’ comp carriers and work diligently alongside claims adjusters to get a claim opened and closed as soon as possible.”
—Quinten Lovejoy, Insurance Risk Advisor, CraneAgency.com
How to Improve Your Experience Modification Rate
Improving your experience modification rate can go a long way toward lowering your workers’ compensation insurance costs. The steps you take now may not cause an immediate reduction, but they can lay the groundwork for lower costs and, more importantly, better safety.
Make Safety a Top Priority
Reducing accidents is essential to minimizing workers’ compensation claims and improving your EMR. Even inexpensive changes to your business practices, such as monthly or weekly inspections of your facilities and vehicles, can reduce accidents. Many small business owners create safety committees and regularly train employees on how to avoid injuries and what to do if there is one to help prevent losses.
“A loss prevention program is specific to the company’s industry and operations. An example is a contractor’s program because their exposures to injury change constantly. They need weekly ‘toolbox’ meetings to discuss safety that is project specific. It may be trenching collapse for one project and falls from structural steel the next project. A good agent and carrier can assist with this, or a company can hire their own staff or outsource the safety program.”
—Rob Yancey, Business Insurance Advisor, Jones Insurance
Depending on your state, you may earn a discount or a premium credit for implementing a formal safety plan. Because the state issues the discounts, carriers must offer you the discount if you meet the state-specific requirements.
Set Up a Return-to-Work Plan
Getting injured, disabled, or sick employees back to work as quickly once their physician releases them can help lower your experience rating, but it takes some forethought. Return-to-work plans typically require job modifications that are specific to the injured worker’s position and may include reorganizing their work station or changing their daily tasks. At the same time, you need to identify essential functions the employee must be able to perform before coming back to work while balancing legal requirements set forth in the Americans with Disabilities Act.
That’s a lot of competing priorities to coordinate, so most employers look for help. Luckily, many insurers and workers’ compensation boards offer assistance in setting up return-to-work programs. The Office of Disability Employment Policy also has a return-to-work toolkit that is a great resource for figuring out how to retain injured employees.
Ask Your Agent to Talk to the Underwriter
You may be able to get a break on your EMR if you’re in a unique situation. For example, say you inherited a business from a family member that has an experience rating of 0.75. However, now that the business is in your name and has a new employer identification number, it’s treated as a new business and assigned an EMR of 1.0.
In that case, you should ask your agent to contact the underwriter, the insurance company employee who evaluates your business’ potential for losses, to see if you can keep the old EMR. The underwriter may be able to help you but will most likely want to know what measures you’re taking to maintain the previous owner’s safety record and address any new risks.
Experience Rating Frequently Asked Questions (FAQs)
Workers’ compensation insurance is a complicated coverage to begin with, and the experience modifier adds to the complication. The following are some of the most frequently asked questions regarding experience modification rates.
Does a safety program reduce my e-mod?
Safety programs can reduce your e-mod if they reduce the number of claims you file. Some insurers require policyholders to set up safety programs, but those that don’t often offer premium credits for businesses that have them. More comprehensive training programs often receive larger credits.
How do I find my experience modification rate on my statement?
Business owners usually get their experience modification rates when they get their initial payroll classifications or renewal statements. Every insurance company uses a slightly different format, but all disclose it to you after your annual premium audit. If you are unable to find your EMR, call your insurance agent to locate it within your renewal paperwork.
What’s the difference between guaranteed cost vs loss sensitive?
Insurance carriers have two methods to price workers’ comp policies: guaranteed cost and loss sensitive. Guaranteed cost policies are what you typically think of when you think of insurance. You pay a fixed premium and all of your risk transfers to your insurer. With loss sensitive policies, you keep some of the risk, but your ultimate premium reflects your actual losses during the life of the policy.
When it comes to their experience modification rate, there are many things a business owner can control. The bottom line is to set safety practices for your business and keep claims to a minimum, both in frequency and severity so that you can maintain a low experience rating and keep costs down.