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There seem to be a lot of myths
and misconceptions that surround
the Experience Modification
Factor. (Also known as an
Experience Modification Rating,
EMR, Experience Modifier, or
just the Mod.) This is an adjustment
that is made to the Workers'
Compensation insurance premium
of companies that meet or exceed
a certain size threshold. This
threshold is measured in manual
premium and varies from state to
state. But typically, a company
that has been paying $5,000 in
manual premium for the past few
years or has paid $10,000 or
more in a single recent year
qualifies to be experience
rated.
This means that an adjustment
factor will be calculated for
such a company based on prior
years' payroll and loss data,
essentially comparing the loss
data of that particular company
to average loss data for all
other employers in that state
who share the same
classification codes.
One common misconception is
that these factors are
calculated by the state. In
most states, this is not
true. Experience mods are
calculated by
rating bureaus
(or as they are now
designated, Advisory
Organizations). Most states
use the
NCCI
for this work, but a few
states have their own rating
bureau. California
uses the
WCIRB, for example,
which is a rating bureau
independent of NCCI.) But NCCI is a
private corporation, created
and funded by member
insurance companies. It is
approved by the states, but
it is not connected with
government in any way. But
California, Delaware,
Indiana, Massachusetts,
Michigan, Minnesota, New
Jersey, New York, North
Carolina, Pennsylvania,
Texas, and Wisconsin have
their own government-run
rating bureaus that are
separate from NCCI.
Another common misconception is
that the experience modification
factor compares a company's past
premiums
with past
losses.
It does not. Instead, the
formula compares actual reported
loss information for that
particular employer with average
loss data for all employers in
that state who are also in the
same classification codes.
Most experience modification
factor calculations use data
from three prior policy
years, but sometimes mods
can be calculated using
fewer policy periods. The
usual "window" used for the
payroll and loss data goes
back four years for the
first policy year, and also
encompasses the next two
policy years. The most
recently-completed policy
year is excluded from the
"window". For example, a
mod effective August 1, 2001
would use policy data from
the policies effective in
1997, 1998, and 1999. The
data from the 2000 policy
would not enter the "window"
until the 2002 mod, when the
data from the 1997 policy
would drop out.
Since the mod is calculated
based on data reported to the
rating bureau by an employers'
past insurers, incorrect or
incomplete data can cause
incorrect experience mods. It
can be worthwhile for employers
to review these mod
calculations, to make sure the
calculation is complete and
accurate. For a detailed
explanation of how to review
your company's experience
modification factor, and how to
correct mistakes, you may want
to order a copy of
The
Ultimate Guide to Workers
Compensation Insurance.
Just published in 2005 by
Entrepreneur Press, this is the
essential reference book for
business owners and managers who
want to control the cost of
Workers' Compensation insurance. |
