An important aspect of reducing what a business pays for workers compensation insurance is understanding what exactly is your businesses experience modification rating. There are several terms that people within the insurance industry will use to refer to this rating. Some of those terms include experience mod, experience rating, e-mod, EMR, and in some cases just the mod. This rating is a factor that compares the losses of your business to other businesses in the same industry and the same classification code. Depending upon the strength of this rating, an insurance carrier may lower or raise the amount a business pays for insurance premium. Here we discuss all that goes in to this rating in order to give a business owner a clear understanding of what makes up the experience modification rating and control what they pay for workers compensation insurance premium.
The reason the experience modification rating is so influential in what a business pays for workers comp premium is designed to predict the future claims of a business. The insurance carrier only makes money if enough of their customers during a given period of time do not have to use their insurance policies. For this reason, insurance companies try to reward businesses who take the proper actions to prevent work comp claims.
There is a form called the Experience Modification Rating Worksheet that a business receives each year before the businesses policy effective date. An experience rating of 1 is considered a unity mod, and does not change the cost of premium. A rating that is >1 is called a debit mod, and would increase the cost of premium. On the contrary, a mod that is <1 is referred to as a credit mod. Businesses with a credit mod typically reduce the cost of insurance to the employer. So if an employer has a mod of 0.80, their premium would be 20% cheaper. The idea being that an insured with a mod that is >1 is riskier than the average business within this classification code. These types of businesses should therefore have to pay more. While an insured with a mod that is <1 is less risky than the average and should be rewarded by paying less.
Who Determines the Experience Modification Rating?
The Experience Modification Rating is generated by the National Council on Compensation Insurance (NCCI). The mod is typically given to a business around 60 to 90 days before the rating effective date. It does not include claims from the current year. NCCI uses a period of three years of losses not including the most recent year and compares it to the average losses in the class. The time period that is used for data is determined by the risk’s rating effective date. The data that is used in the experience mod rating calculation includes the policies that have an effective date no less than 21 months prior, and no more than 57 months before the rating effective date. For example, a policy that renews on 1/1/18 would include policies with effective dates that fall between 4/1/13 and 4/1/16. Therefore, the policies included in the data for this particular experience modification rating are 1/1/14-1/1/15, 1/1/15-1/1/16, and 1/1/16-1/1/17 policies.
How is the Experience Modification Rating Calculated?
The experience modification rating is calculated by taking the total adjusted actual claims divided by the total adjusted expected claims of your class (Experience Modification Rating = Total Adjusted Actual Losses ÷ Total Adjusted Expected Losses). If a business has more claims than expected, the mod will be >1 and the business will receive a debit mod. While this may seem simple, there are many complicated steps that must be taken before the final mod is produced.
The first step is that NCCI collects and records the payroll and loss information of your company and applies it to the experience rating worksheet. Using this information, NCCI can calculate the expected losses for each classification using its Expected Loss Rate (ELR). The ELR is the amount of expected losses for the classification per $100 of payroll [ELR x (Payroll/100)]. Next NCCI splits the expected losses into primary and excess losses.
The difference between Severity and Frequency of claims
When an underwriter within an insurance carrier begins to analyze a particular business they start with a businesses loss history. The terms severity and frequency are important because they tell the true story of what is happening at a particular business. They can show patterns and help the underwriter predict future losses. Severity refers to how severe the claims were for a business during a given amount of time. Frequency refers to how often claims occur. When calculating an experience mod, NCCI assigns more weight to high frequency of claims than it does to high severity claims. This is because if a business has a history with a high frequency of claims, there is a good chance the business will continue to have losses. Also, having a high frequency of claims increases the chance that the insured will experience a larger loss in the future. In other words, frequency leads to severity. On the contrary, if a business has a year in which they have one claim with a high severity, there is a good chance this incident was more of an outlier and not a sign of how the business operates. Businesses like this are less likely to have an accident or injury occur again.
How can Businesses Improve the Experience Modification Rating?
Developing and implementing a safety program can go a long way towards keeping your business safe and limiting the amount of claims on your workers compensation insurance policy. This program should be well-documented. If it is documented, it can be used by your independent insurance agent to negotiate for lower rates on premium and to prevent an increase in premium after a year in which you have several claims.
Return to Work Programs
Implementing a Return to Work Program can help tremendously with the severity of claims. Humans are creatures of habit and the longer an injured worker spends away from their work environment after an injury, the more likely they are to develop new habits away from their work community. When they develop these new habits, the more likely they are to not return to work. This is when the severity of a claim can have damaging impacts on a businesses experience modification rating.
Choose an Independent Agent
Choosing an independent insurance agent can take a lot of the hassle out of the insurance buying process. Choosing an independent agent allows you to solicit advice from them about the pros and cons of each carrier. Like most things in life, when an insurance policy is dramatically cheaper than its competitors there is usually a reason for the lower price. That reason is not because they provide better service. An independent agent can give you this advice where as an agent who sells only the insurance of one carrier is not able to tell you the ugly truth of the insurance business.
Speak Long and Honestly with your Insurance Agent
Taking some additional time to speak with your agent about the daily ins and outs of your business will help them place your business in the proper classification code and prevent cracks in your coverage. The more information you give your insurance agent the more likely you are to get what you are looking for from them. This is very true when it comes to what you value as a business owner. If price is your main determining factor than it is important to express this to them. If there is one area of your business that is extremely valuable, you should tell your agent this and they can discuss with you all the options they have to protect that aspect of your business. Remember, in the end, your insurance agent works for you (or at least they should). If you are not getting out of your experience what you expect, you should tell them and if they do not correct the problem it may be a time for you to find a new agent who can meet your priorities.