What Is EMR in Insurance and How Does It Affect Premiums?

The Experience Modification Rate (EMR) is a numerical factor that significantly influences the cost of a business’s workers’ compensation insurance. It essentially serves as a predictive indicator of future claims based on past performance, with a direct link to a company’s safety record and overall claims history.

Defining EMR in Insurance

EMR, or Experience Modification Rate, is a unique numerical factor used within the workers’ compensation insurance system. Its fundamental purpose is to adjust a company’s insurance premium based on its historical claims experience compared to other businesses operating in the same industry. This adjustment reflects whether a company’s past workers’ compensation losses are better or worse than what is statistically expected for its industry and size.

A rating bureau, such as the National Council on Compensation Insurance (NCCI) in most states, calculates and issues EMRs. The NCCI is a non-profit organization that collects and analyzes workers’ compensation data, manages classification codes, and provides rate recommendations.

How EMR is Determined

The calculation of an EMR involves a comparison between a company’s actual losses and its expected losses. Actual losses represent the total cost of workers’ compensation claims paid out over a specific period, typically the three policy years preceding the most recent expired policy period. Expected losses, conversely, are a statistical prediction of what a company of a similar size and industry should incur in claims, serving as a benchmark.

Payroll plays a significant role in determining expected losses. Insurers use payroll classified by job type, combined with industry-specific risk factors, to estimate the anticipated claims for a business. If a company’s actual losses are lower than its expected losses, it results in an EMR below 1.0, which acts as a credit. Conversely, if actual losses exceed expected losses, the EMR will be above 1.0, resulting in a debit. The formula also considers the frequency and severity of claims, with frequent, smaller claims often having a more pronounced negative impact than a single large claim.

EMR’s Influence on Workers’ Compensation Premiums

The calculated EMR directly impacts a business’s workers’ compensation insurance premiums by acting as a multiplier. This numerical factor is applied to the company’s base premium, which is determined by factors like payroll and industry classification rates. For instance, an EMR of 0.80 would lead to a 20% reduction in the premium, signifying a better-than-average safety record. Conversely, an EMR of 1.20 would result in a 20% increase in the premium, indicating a higher-than-average claims history. A favorable EMR, below 1.0, can lead to substantial cost savings on workers’ compensation insurance. An unfavorable EMR, above 1.0, can lead to significant premium increases.