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 your others in your industry. Businesses with lower EMRs pay less for their workers’ compensation insurance. EMRs commonly range between 0.48 and 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 $1.21 per $100 of payroll, 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. 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 their 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 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.
Did You Know?
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 claims. The 15 states that don’t use the NCCI may handle COVID claims differently. They include California, Delaware, Indiana, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, North Dakota, Ohio, Pennsylvania, Washington, Wisconsin, and Wyoming.
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. An EMR lower than 1.0 causes your workers’ comp costs to 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’ 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).
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. In essence. that means their 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.
After three years, you’re no longer new, so you receive an experience rating that impacts your costs just like the other employers in your state. Few and infrequent claims will most likely cause your workers’ comp rate to be lower than businesses similar to yours, and claims that are more frequent, more serious, or more costly may raise your EMR above 1.0, resulting in higher premiums.
Finding Your EMR
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 cannot find your EMR, call your insurance agent to locate it within your renewal paperwork.
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, such as 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 EMR.
- 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: Generally, new businesses operating for three years or fewer 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.
Business owners want claims to be off the three-year cycle as soon as possible, which is why reporting claims promptly is important. The sooner the claim is filed and closed, the sooner it will fall off the EMR books. This can help bring rates back down sooner than later.
Construction Industry Considerations
Controlling the EMR in construction is imperative. Employees constantly are in high-risk scenarios because of the manual labor, dangerous heights, and heavy equipment. In addition to concerns about high insurance premiums, contractors should note that governments―and many private companies―won’t work with businesses with experience 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.
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.
Safety programs can reduce your EMR 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. 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.
Many contractors and construction companies have what are called “toolbox” meetings. These are weekly meetings that cover the biggest risks based on the job of the week. This could be working with trenches one week and moving on to dealing with scaffolding the next. These meetings serve as reminders of safety protocol to help keep employees focused and safe.
Pro Tip: 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 OSHA’s “$afety Pays” calculator.
Consider a Loss-sensitive Policy
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.
Loss-sensitive policies, like a workers’ comp dividend or small deductible plan
, are different. You keep some of the risk, but your ultimate premium reflects your actual losses during the life of the policy. This adjustment can reduce the premiums you pay significantly while incentivizing you to improve safety.
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, 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. Plus, you need to identify essential functions the employee must be able to perform before coming back to work while balancing legal requirements outlined in the Americans with Disabilities Act (ADA).
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.
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.