Experience Modification Rating: Definition & How To Improve It
Nathan Weller is an Insurance Expert focusing on insurance for small business. He has 15 years experience in insurance operations, FNOL, and claims handling.
This article is part of a larger series on Workers' Compensation Insurance.
An experience modification rate (EMR) is a multiplier insurance companies use to help set workers’ compensation premiums. Insurers determine your EMR by looking at your workers’ comp claims history and potential for future injuries compared to others in your industry. Businesses with lower EMRs pay less for workers’ compensation insurance. EMRs commonly range from 0.48 to 1.00 but can be 1.25 or higher.
It’s important to control workers’ compensation costs by keeping control over the EMR. With the average coverage costing $1.07 per $100 of payroll (a COVID-19 pandemic-led decrease of over 20%), employers have an opportunity to reduce their premiums by keeping the EMR below 1. This is best achieved by having strong loss control measures that help prevent injuries.
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.
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 use their own system.
Your class code is then multiplied by your payroll costs divided by $100, and that is multiplied by your experience modification rate. The result is your ultimate workers’ comp costs. Once insurers know your EMR, they plug it into an equation to determine your workers’ compensation premium.
The EMR rating range will change based on your claims history. 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. 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.
For example, let’s say you originally paid $100 per employee, per year, for your workers’ comp insurance, 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 = $120).
The construction industry is a good illustration of how the EMR works and can impact your business directly.
Employees are constantly in high-risk scenarios because of manual labor, dangerous heights, and heavy equipment. In addition to concerns about high insurance premiums, contractors should note that governments, as well as many private companies, won’t work with businesses with EMR ratings above a certain number. Being above the maximum EMR keeps a contractor from getting lucrative contracts.
Ultimately, there is a lot of incentive to limit claims and keep a lower EMR in the construction industry. While employers cannot prevent every injury from happening, they can put in place a series of safety standards and create a culture of safety that limits injuries.
The NCCI has decided to exclude COVID-19 claims from businesses’ experience ratings, which means businesses in states that use the NCCI won’t be penalized for COVID-19 claims. The 11 states that don’t use the NCCI may handle COVID-19 claims differently. They include California, Delaware, Michigan, New Jersey, New York, North Carolina, and Pennsylvania, and the four monopolistic states of Ohio, North Dakota, Washington, and Wyoming.
Factors Affecting EMR Rating Range
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 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 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 EMR rating range reductions. This is why reporting claims promptly is important—the sooner the claim is filed and closed, the sooner it will fall off the EMR books.
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.
1. 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.
Take advantage of the loss control programs offered by your provider. 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 and may give premium credits to companies that have them, and more comprehensive training programs often receive larger credits.
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.
Workplace injuries often have a negative effect on the bottom line of the business even with workers’ compensation insurance in place. You can learn more about the cost of claims to your business’ profits by using the Occupational Safety and Health Administration (OSHA) “$afety Pays” calculator.
2. Consider a Loss-sensitive Policy
Insurance carriers have two methods to price workers’ comp policies.
- 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.
- Loss-sensitive policies, like a workers’ comp dividend or small deductible plan, are different. You keep some of the risks, but your ultimate premium reflects your actual losses during the life of the policy. This adjustment can reduce the premiums you pay while also incentivizing you to improve safety.
3. Set Up a Return-to-Work Plan
Getting injured, disabled, or sick employees back to work quickly once their physician releases them can help lower your experience rating. Return-to-work plans typically require job modifications that are specific to the injured worker’s position and may include reorganizing their workstation or changing their daily tasks. Plus, 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 (ADA).
The best workers’ comp providers will offer assistance in return to work plans, including utilizing alternative work with nonprofit organizations. 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.
Frequently Asked Questions (FAQs)
New employers are usually assigned an EMR of 1.0. Once employers have three years of claims history, most states adjust the business’s EMR, which means their workers’ comp premium will probably change. After three years, they’re no longer new, so they receive an experience rating that impacts their costs just like the other employers in their state.
Business owners usually get their EMRs when they receive their initial payroll classifications or renewal statements. Every insurance company uses a slightly different format, but all disclose it after your annual premium audit. If you are unable to find your EMR, call your insurance agent to locate it within your renewal paperwork.
Your EMR 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. An EMR lower than 1.0 causes your workers’ comp costs to go down.
Bottom Line
When it comes to the EMR, 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.
