Experience Modification Rates: Questions and Answers

What are Experience Modification Rates?

Experience Modification Rate (EMR), also known as eMod or mod rate, is a critical component of an employer’s workers’ compensation insurance premiums.  Experience Modification Rates are factors used by insurance companies when developing insurance premium pricing, most commonly workers’ compensation insurance.  The rates are based on previous losses for a particular company in order to better predict future losses and more accurately price insurance premiums.  In other words, Experience Modification Rates are to insurance premiums to what credit scores are to loan interest rates. Higher rates equate to more costly insurance premiums.

The NCCI and Experience Modification Rate Calculations

The National Council on Compensation Insurance (NCCI) is a non-profit insurance rating and data collection bureau owned by its members, which consist of insurance companies.  The NCCI annually collects information and data from over 4 million workers’ compensation claims and publishes data analysis used by insurance companies, regulators, and employers. The NCCI also issues industry manuals and best practices for insurers to price premiums, including various Experience Modification Rate calculations.

Currently, 39 U.S. states participate in the NCCI’s Experience Rating Plan Manual for Workers Compensation and Employers Liability Insurance. In these states, the Experience Rating Plan is mandatory and applies to all employers that meet a state’s premium eligibility criteria. Other states, such as Minnesota, New York, and Wisconsin have independent rating organizations, but also permit the combination with states that have approved the NCCI Plan for interstate experience rating in some instances.

The formula that the NCCI has developed for calculating Experience Modification Rate uses the ratio between expected losses in a particular industry and what a specific company has previously incurred.  Factors that are considered include the frequency and severity of losses actually incurred and the job type of the employee.

Experience Modification Rates and Insurance Premiums

The Experience Modification Rate is multiplied against the manual premium rate, similar to the average, or expected rated for a similar company in a particular industry.  The result is the actual premium, before any additional discounts or credits are factored in.  Any Experience Modification Rate that is below 1.00 means that a company is expected to incur less losses that a similar company within that same industry.  Thus, an Experience Modification Rate that is less than 1.0 will reduce premiums. Conversely, a rate that is above 1.0 will lead to higher premiums when compared to industry averages.

There are two main benefits of using Experience Modification Rates when calculating insurance premiums.  First, the insurance cost is tailored to the specific risks of a particular company, rather than an industry average.  Second, the use of an Experience Modification Rate can encourage employers to explore ways to reduce losses.

Ways to Lower an Experience Modification Rate

Simply put, less incurred losses lead to lower Experience Modification Rates.  The best way to ensure fewer and less severe losses are to verify that claims are filed accurately and timely, and that the company maintains programs that encourage workplace safety and a healthy return to work after an injury.  Companies can take the following steps to lower insurance losses, resulting in a lower Experience Modification Rate:

Establish Injury Planning and Procedures

Companies should have adequate procedures in place to ensure prompt reporting and care for injured employees. Maintaining clear communication with the employee throughout the claims process also helps to make certain there is proper care and understanding of medical treatment, claims processing and payment, and how payroll is affected.

Maintain Effective Claims Management

Ensuring that claims are handled using best practices is one way to minimize insurance losses and reduce Experience Modification Rates. Accident investigations should include written statements from the employee and witnesses, supervisor reports, and a process for following-up on all incidents to address any required corrective action to prevent similar incidents from occurring in the future.

Set Comprehensive Workplace Safety Standards

Workplace safety standards start with compliance with Occupational Safety and Health Administration (OSHA) rules and regulations.  OSHA publishes a handbook for small businesses that outlines a four-point workplace program that includes:

1. Management commitment and employee involvement
2. Worksite analysis
3. Hazard prevention and control; and
4. Training for employees, supervisors, and managers.

By following these guidelines, organizations can create a culture of safety and compliance, ultimately preventing injury and loss.

Implement Return to Work Programs

Many companies offer employees programs that allow for an earlier return to work on “modified duty”, which can minimize the cost of insurance claims by reducing temporary total disability payments and typically lead to faster recovery rates for injured individuals.

Use Discounts Offered by State Agencies

Most states have programs established to minimize workplace injury and offer credits to insurers for those companies that participate. These programs typically relate to the implementation of standardized safety protocols and formalized drug policies. In order to qualify for credits, companies must submit documentation to the state as support that the required criteria have been met. The percentage amount of credits vary by state but are typically around 3 to 5 percent of the insurance premium.

Ensure Accurate Employee Classifications

The NCCI has developed over 700 employee classification codes for the purpose of calculating rates. The code used for a specific position will determine the amount of expected losses for that particular job role. Because every type of position carries a different amount of risk, companies should ensure that the appropriate codes are used for each employee, as they have a direct impact on the Experience Modification Rate.

Overall, the end goal for most companies is to minimize workplace injuries and reduce the costs of insurance associated with them. By understanding the way Experience Modification Rates impact insurance premium pricing, companies can be better prepared to prevent future injuries and losses within the organization and ultimately see insurance premiums decline as result.