As a commercial business owner, you may have heard about the Experience Modification Rate (EMR), but what is it, and how is it calculated? It’s important to understand because it affects your workers’ compensation insurance premium, and an expensive policy can take away from money you could spend elsewhere and impacts your bottom line. This is especially true for some industries, such as construction contracting, where a high EMR can even cost you jobs and bids.
What is an Experience Modification Rate?
The Experience Modification Rate, is a numeric representation of a business’s claims history and safety record as compared to other businesses in the same industry within the same state. Your EMR basically states one of three things:
- Your company is riskier than average (EMR > 1.00—results in a higher premium)
- Your company is no more or less risky than average (EMR = 1.00—results in no change to premium)
- Your company is safer than average (EMR < 1.00—results in a lower premium)
To put it simply, the EMR is calculated based on the job code, the payroll, your company’s past losses and the premium itself. Then the EMR is used to determine your final workers’ compensation premium.
For example, a company with an EMR of 1.25 will pay 25% higher premiums than the average company does, while conversely, a company with .80 will pay 20% less per dollar than average. In real dollars, a company with a modifier of 1.25 and a standard premium of $100,000 will pay a modified premium of $125,000. A company with a modifier of .80 and a standard premium of $100,000 will pay a modified premium of $80,000. This represents a difference of $45,000 savings between these companies.
Who Calculates the EMR?
Most states use the National Council on Compensation Insurance (NCCI) to collect data and calculate the EMR (a.k.a. Mod Factor, Modification Factor, or Mod Rate). NCCI is a private corporation funded by member insurance companies. The following states have their own government run rating bureaus that are separate from NCCI: California, Delaware, Indiana, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, Pennsylvania, Texas, and Wisconsin.
How is the Mod Rate Calculated?
While calculating the Experience Modification Factor is complex, the underlying theory and purpose of the formula is straight forward. Your company’s actual losses are compared to its expected losses by industry type. The formula incorporates factors that take into account company size, unexpected large losses, and the difference between loss frequency and loss severity to achieve a balance between fairness and accountability.
What is the Experience Rating Period?
The Experience Modification Rate is calculated using loss and payroll data for an experience rating period. The experience rating period includes data for three policy years, excluding the current term.
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Experience Mod: 2019-2020
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Excluded: 2018-2019
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Included: 2015-2018
The actual loss data is separated into primary and excess pools. Primary losses measure frequency and are comprised of the first $17,500 of claim dollars. Excess losses measure severity and are comprised of amounts in excess of $17,500. The modification formulation penalizes loss frequency by including all loss amounts in the calculation, so, in essence, loss frequency is worse for your EMR than severity. The reasoning here is that it is thought that these types of frequent, smaller claims can be controlled through risk management and loss control. Primary losses in excess of $17,500 are capped at $17,500; this minimizes the impact of any single, large claim.
The final Experience Modification formulation compares your actual primary and excess loss numbers to those expected for a company of the same size and industry type within a state.
Can I lower my EMR?
The higher your Experience Modification Rate, the more you’re going to pay for your workers’ compensation premium. Anything over 1.00 will result in you paying a surcharge. Freak accidents occur—that’s why you have coverage; however, you can work with your trusted insurance advisor to implement workplace safety programs to prevent those frequent, smaller, avoidable claims. If you don’t prioritize risk and safety management in the workplace, your lack of attention to safety could cost your company big time in workers’ compensation premium.
Interested in better understanding your EMR or finding out how to implement a workplace safety program? Contact me at jeffw@psafinancial.com.
