Understanding Your Experience Modification Factor
There seem to be a lot of myths and misconceptions that surround the Experience Modification Factor.
(Also known as an Experience Modification Rating, EMR, X-Mod, 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. The experience modifier is a multiplier that is applied to the calculation of manual premium.
So if your company's modifier is 1.25, you get a 25% surcharge on your premium. If your modifier comes out at a .75, you get a 25% discount. Normally, the experience modifier for a company gets recalculated annually, timed to coincide with the policy renewal.
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 National Council on Compensation Insurance, or 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 separate rating bureaus.
Some of these other rating bureaus are run by their state governments. Modifiers calculated for California, Delaware, Pennsylvania, Michigan, and New Jersey are stand-alone modifiers, meaning that they are used only on premium charges for those individual states, even if the company also has operations in other states. But rating data from Indiana, Massachusetts, Minnesota, and New York gets integrated into a single multi-state modifier when a company has operations in multiple states.
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 modifiers. It can be worthwhile for employers to review these mod calculations, to make sure the calculation is complete and accurate.
For many companies, keeping down their experience modification factor is a vital concern beyond merely the cost of Workers Compensation insurance.
This is because increasingly the experience mod is being used as a rough benchmark of safety by potential clients. Having a modifier above 1.00 can shut out many kinds of businesses from bidding on important projects.
NCCI has introduced a new rating formula effective as of January 1, 2013. This change will produce lower modifiers for employers without large individual claims in their history, but will increase modifiers for employers with larger individual claims. The change in rating formula increases significantly the percentage of individual claims that gets fully counted in the experience rating.
A more detailed explanation of the change can be found here. And here. And here and here. The net effect on experience modifiers will vary, depending on the claims history of individual employers. Some employers with favorable loss histories will have lower modifiers under the new formula than under the previous one. But employers with less favorable loss histories will likely get higher experience mods than would have been under the case with the prior rating formula. This is because of a change in what is known as the "split point" in the rating formula. The split point sets how much of a claim is fully counted as a "primary loss" in the experience rating formula, with the amount of the claim above the split point being discounted in its impact on the experience mod.
We've prepared a PowerPoint presentation that explains the changes in more detail as well.
Keep in mind, as explained above, not all states use NCCI to compute experience modifiers. But most U.S. jurisdictions do use NCCI. So most employers will be impacted by this significant change in NCCI experience rating.
AIM is experienced in helping companies review experience modifiers from all states and all rating bureaus, and determining what can be done to reduce modifiers.
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:
This is the essential reference book for business owners and managers who want to control the cost of Workers' Compensation insurance.
Consultants on Workers Comp Classification Codes, Experience Modifiers, Payroll Audits, & More
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