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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, 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
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 other
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 mods. 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.
AIM is experienced in helping
companies review experience
modifiers and determining what can
be done to reduce modifiers.
Contact AIM
for more information on reducing
experience 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:
Worker's
Compensation:
A
Field Guide
for Employers.
This is
the essential reference book
for business owners and
managers who want to control
the cost of Workers'
Compensation insurance.
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