Workers’ compensation insurance is a critical aspect of any business’s risk management strategy. Because of the costs involved it is vitally important to a company’s finances if the business has employees that its workers’ comp policy is proper and appropriate.
To begin, let me answer a question I receive from time-to-time. Most businesses start with a rating of 1.0. I’ll explain what that means below….
Workers’ compensation is really two types of insurance in so much as it provides coverage for medical expenses, rehabilitation costs, and lost wages if an employee is injured on the job. One of the key factors that influence the cost of workers’ compensation insurance is the Experience Modification Rating.
Understanding what an Experience Modification Rating is, how it is calculated, and the requirements to receive one is crucial for businesses looking to manage their insurance costs effectively.
Here, I will touch on some of the important key intricacies of the Experience Modification Rating, explaining its significance, calculation, and the impact it has on a business’s workers’ compensation premiums.
What Is an Experience Modification Rating?
The Experience Modification Rating, often referred to as EMR, Experience Mod, or Mod Rate, is a numerical value used by insurance (and other) companies to gauge the past cost of injuries and future risk associated with a business. Essentially, it is a measure of a company’s safety record in comparison to other businesses in the same industry.
The EMR is a factor that adjusts the premium for workers’ compensation insurance.
An Experience Modification Rating of 1.0 is considered the industry average, meaning the company’s claims history is on par with similar businesses for a given amount of payroll. A rating above 1.0 indicates a higher-than-average risk, leading to higher insurance premiums.
Conversely, a rating below 1.0 suggests a better-than-average safety record, which can result in lower premiums. In Wisconsin, the only way to reduce premiums is through an Experience Mod because the state controls the premium.
For example, a company with an EMR of 1.2 would pay 20% more for workers’ compensation insurance than a company with an EMR of 1.0, while a company with an EMR of 0.8 would pay 20% less. As you can quickly see, an EMR plays a significant role in a company’s overall insurance costs and can impact competitiveness, particularly in industries where contracts are awarded based on a company’s safety record.
The Importance of your business’ EMR number
The EMR is not just a number; it’s in part, a reflection of a company’s commitment to workplace safety. A high EMR can have several consequences for a business:
- Increased Insurance Costs: Since the Experience Modification Rating directly influences workers’ compensation premiums, a high rating can obviously lead to significantly higher insurance costs. This can strain a company’s budget and reduce profitability.
- Competitive Disadvantage: Many companies, particularly in construction and manufacturing, require contractors and subcontractors to have an EMR below a certain threshold to bid on projects. A high EMR can therefore limit a company’s ability to secure contracts. It’s not uncommon for a potential contract to require an Experience Modification Rating as part of the contract process
- Reputation: A high EMR can signal to potential clients, employees, and partners that a company has a poor safety record, which can harm its reputation in the industry.
- Compliance and Legal Issues: Businesses with high EMRs might face increased scrutiny from regulatory bodies, leading to more frequent inspections and potential fines if safety standards are not met.
How Is the Experience Modification Rating Calculated?
The calculation of the EMR is complex and varies slightly depending on the state and the insurance rating bureau involved, with the National Council on Compensation Insurance (NCCI) being the most prominent in the U.S. However, the basic formula used to calculate the EMR is consistent:
Experience Modification Rating=Actual Losses/Expected Losses
- EMR of 0.80 = 20% premium credit (lower premium)
- EMR of 1.20 = 20% premium debit (higher premium)
- Actual Losses: These are the company’s actual workers’ compensation claims over a certain period, usually three years, excluding the most recent policy year.
- Expected Losses: These are the losses that are expected for a business of similar size and in the same industry, based on nationwide data.
The Experience Modification Rating formula also includes several modifiers and weighting factors to account for the size of the company and the severity of claims. For example, a large claim might be partially excluded from the calculation to prevent a single incident from drastically inflating the EMR.
Factors Influencing the EMR
Several factors can influence a company’s EMR, making it either higher or lower than the industry average:
- Claim Frequency: The number of claims filed by a company plays a significant role in the EMR calculation. Frequent small claims can be more detrimental to the EMR than a single large claim because they suggest systemic safety issues.
- Claim Severity: The cost of claims also impacts the EMR. High-severity claims can increase the EMR, although as mentioned, there are caps and limitations to prevent single large claims from disproportionately affecting the rating.
- Payroll: The amount of payroll in each job classification also affects the EMR. Higher payrolls in more hazardous job classifications increase the expected losses, which in turn affects the EMR.
- Industry Class: The industry in which the business operates is a significant factor. Industries with higher risks, such as construction or manufacturing, typically have higher expected losses, which influences the Experience Modification Rating calculation.
- Company Size: Larger companies may have more claims due to the sheer number of employees, but their size also means that the impact of any single claim on the EMR is diluted. Smaller companies, on the other hand, may see a more significant impact from a single claim.
Requirements to Receive an Experience Modification Rating
Not every business receives one. There are specific requirements that a company must meet to be eligible for an EMR rating:
- Eligibility Criteria: Generally, businesses that meet certain premium thresholds are eligible for an EMR. This threshold varies by state and rating bureau, but it typically applies to companies that pay a minimum annual premium, often around $5,000 or more. Smaller businesses that do not meet this threshold may not receive an EMR.
- History of Operations: A company must have a sufficient history of operations to establish a reliable safety record. Typically, this means that the company must have been in operation for at least three years, providing enough data to calculate the Experience Modification Rating accurately.
- Claims Data: The company must have a record of workers’ compensation claims. This data is essential for calculating the actual losses, which are compared to expected losses in the EMR formula. Without claims data, an EMR cannot be calculated. As side note (for those statistical geeks, which includes myself), in order for a calculation of probability to be calculated, at least two opposite occurrences must happen to reliably calculate the probable outcome. This means, generally, a company must have at least two workers’ comp claims in a three year period to truly calculate the odds. That said, companies without claims will regardless receive an experience mod based on the industry and payroll, all else being equal. The ‘requirement’ of claims is ignored, and while the predictive ability is diminished, it doesn’t change the fact that generally a company without claims is viewed as a better risk when all factors are considered.
- State-Specific Requirements: Some states have specific requirements or modifications to the standard EMR calculation process. For example, California has its own rating bureau, the Workers’ Compensation Insurance Rating Bureau (WCIRB), which may have slightly different rules for calculating the EMR. And as stated, some states regulate the premium, and having a safe working environment may be the easiest and only means to lower workers’ comp premium costs.
How to Manage and Improve Your Mod
By this point you can see that managing and improving your Experience Modification Rating is crucial for reducing workers’ compensation costs and maintaining a competitive edge. Here are some strategies to consider:
- Invest in Safety Programs: The most effective way to lower your EMR is to prevent workplace injuries from occurring in the first place. Investing in robust safety training programs, conducting regular safety audits, and fostering a culture of safety within your organization can help reduce the frequency and severity of claims.
- Early Return-to-Work Programs: Implementing early return-to-work programs can help reduce the impact of claims on your EMR. By providing modified duties to injured employees, you can minimize the amount of time they are out of work, which can lower the cost of claims.
- Claims Management: Effective claims management is essential for controlling workers’ compensation costs. This includes promptly reporting claims, working closely with the insurance carrier to manage the claims process, and ensuring that injured employees receive appropriate medical care and return to work as soon as possible.
- Review and Correct Errors: Regularly reviewing your EMR calculation and claims data is important to identify and correct any errors that could be inflating your rating. Work with your insurance carrier to ensure that all claims are accurately reported and that any claims that should not be included in the EMR calculation are excluded.
- Consider Deductibles or Retrospective Rating Plans: Some companies can opt for a deductible or retrospective rating plan, which can reduce the overall workers’ compensation premium. These plans require careful consideration and should be discussed with an insurance professional to ensure they are appropriate for your business.
The Experience Modification Rating is a critical metric that influences workers’ compensation insurance costs and reflects a company’s commitment to workplace safety. A lower EMR not only reduces insurance premiums but also enhances a company’s reputation, competitiveness, and ability to attract talent. By understanding the factors that influence the EMR and implementing strategies to manage it effectively, businesses can ensure they remain financially healthy and continue to grow.
Companies should regularly review their Experience Modification Rating and work closely with their insurance carriers to ensure accuracy. Investing in safety programs and effective claims management are essential steps toward maintaining a favorable EMR. If you have further questions about your workers’ comp policy, feel free to reach out and see what we can do to help.