What Is an Experience Mod and How Does It Affect Premiums?

The Experience Modification Rate, or EMR, is a numerical factor used in workers’ compensation insurance. It helps determine a business’s premium by adjusting costs based on its past claims history. This mechanism tailors insurance costs to an individual business’s specific risk profile, moving beyond general industry averages.

Defining the Experience Modification Rate

The Experience Modification Rate is a factor calculated by independent rating bureaus, such as the National Council on Compensation Insurance (NCCI) for most states. These organizations collect and analyze claims data reported by insurers to establish an employer’s risk profile. The EMR reflects a company’s actual workers’ compensation losses compared to the expected losses for businesses of similar size and industry.

An EMR of 1.0 is the industry average, indicating that a business’s claims experience aligns with typical expectations. If a company’s EMR is below 1.0, it suggests a better-than-average claims experience, leading to a discount on its workers’ compensation premium. Conversely, an EMR above 1.0 signifies a worse-than-average claims history, resulting in a premium surcharge.

Inputs for Experience Mod Calculation

The calculation of an experience mod involves specific data points collected by rating bureaus. A primary input is a company’s payroll, broken down by workers’ compensation classification codes. Payroll serves as the exposure base for calculating expected losses.

Classification codes categorize different types of work, allowing for a comparison of a company’s losses against industry averages. Actual losses, representing the incurred costs of workers’ compensation claims like medical expenses and lost wages, are directly factored into the calculation. These actual losses are then compared against expected losses, which act as a benchmark for average losses anticipated for a comparable company.

A significant aspect of the calculation involves differentiating between primary and excess losses. Claim costs are split, with only a portion of each claim, known as the “primary” loss, being fully weighted. This mechanism places greater emphasis on claim frequency rather than severity, recognizing that numerous small claims can indicate systemic safety issues. The rating period for the experience mod calculation generally includes data from the three full policy years preceding the most recently completed year. This one-year gap allows for claims to mature and for more accurate loss data to be reported.

Effect on Workers’ Compensation Premiums

The experience modification rate directly influences a company’s workers’ compensation insurance premiums. Once calculated, the EMR is applied as a multiplier to the manual premium, which is the base premium before any adjustments. This application means that a company’s actual premium can be significantly higher or lower than the standard rate for its industry.

For instance, if a business has a manual premium of $50,000 and an EMR of 0.82, its adjusted premium would be $41,000, representing an 18% discount. Conversely, if the same business had an EMR of 1.35, its premium would increase to $67,500, a 35% surcharge. Even small fluctuations in the EMR can lead to substantial differences in premium costs.

Variables Affecting the Experience Mod

Several operational and claims management variables can influence whether a company’s experience mod increases or decreases. The distinction between claim frequency and severity is particularly impactful on the EMR. Frequent small claims often have a greater negative effect on the experience mod than a single large claim, due to how primary and excess losses are weighted. This weighting reflects that frequent incidents may indicate underlying safety program deficiencies.

Prompt reporting of incidents and claims can affect the overall cost of a claim, which impacts the experience mod. Delays in reporting can lead to increased costs. The accuracy of payroll and classification data submitted to rating bureaus is also important. Errors or misclassifications can result in an inaccurate experience mod.

Furthermore, the implementation of return-to-work initiatives can reduce overall claim costs by minimizing lost wage payments, positively influencing the mod. These programs help injured employees return to productive work sooner. Subrogation recoveries, where costs are recouped from a responsible third party, can also reduce the net loss amount associated with a claim, affecting the experience mod favorably.