Experience Modification Rate- EMR Rating

Workers compensation insurance experience rating is a mandatory program designed to measure and rate the risk of individual companies against other businesses in the same industry. Experience rating compares an employer's actual claims experience to the expected or average experience of all similar business types within a state.

An experience modification is developed and applied to risks with premium large enough for the insured's past experience to be an indicator of how much benefit, or claims, costs will be paid on behalf of the insured in the future. If an employer's past experience is better or worse than average, his premium is adjusted downward or upward by the application of the Emod, respectively.

In general, employer experience rating refers to a record of premiums and losses over the course of all applicable prior work comp polices. This provides a basis to predict future rates or costs for insurance carriers.

An employers' experience modification rate refers the factor calculated from actual loss experience amd used to adjust an the businesses manual premiums (higher or lower) based on the businesses loss experience relative to the average underlying manual premiums. The Modifier (X-mod) compares the insured experience to the average class experience.

Business owners and insurance agents use numerous interchangeable terms when referring to their experience modification rate. Synonyms include: EMT Rating, X-mod, Emod, ncci credit, mod rate, experience modification factor, ncci worksheet and EMR number.

What is the Purpose of Experience Rating?

The intent and purpose of experience rating is to incentivize business owners to take meaningful actions to reduce and prevent injuries. Workers comp manual rates group employers by their class codes, but that does not differentiate a business with no claims from a business averaging several claims a year. The business with no claims should pay less for coverage. The business with more claims should pay a larger share of the premium needed to provide for the cost of the claims.

How to Qualify for an Experience Modification Rate?

A business will not have an Emod for the first 1-3 years after it opens. Some very small businesses may never qualify for an experience modifier in some states. Qualifying for an EMR rating will vary by state, but the overall concept is the same. There are two triggers for qualification:

• Total policy premium exceeds dollar threshold for one policy period
• Total policy premium exceeds lower threshold for more than two policy periods

As an example, the state of Missouri has a one year threshold of $7,000 in premium before a business will be assigned and Emod and a Rating Effective Date (RED). Otherwise, the business will need premium to exceed $3,500 for more than two policy periods before it can qualify for an EMR rating. Each state sets their own dollar value for x-mod qualification.

Who Calculates Experience Ratings?

NCCI administers workers' compensation experience rating for 39 states. All business owners have a right to request their experience modification rate worksheet from NCCI or their state authority. States that administer their own EMR Rating programs include:

Here's Example of an NCCI Worksheet

The workers comp experience modification worksheet is a summary of claims and losses. It indicates how expected losses compare to actual losses over a period of time. Each year, qualifying businesses will receive a new Emod worksheet about 90 days prior to their Rating Effective Date.

What is NCCI?

Workers Comp Modification Factor

A modification factor is a factor applied to the policy premium for a risk to reflect variation from the experience of the average risk of a similar type. From the risk's own past experience, the experience modification rate is determined by comparing actual losses to expected losses. This comparison of future losses results in a premium reduction (credit) or a premium increase (debit).

For example, a modification of .85 results in a 15% credit or savings to the risk, while a modification of 1.10 produces a 10% debit or additional charge to the risk. In some cases, no change results and a modification of 1.00 (unity) is applied.

Experience Modification Factor (E-MOD)

In computing insurance premiums, experience modification factor refers to a provision for premium adjustment that recognized the merits or demerits of individual risks.

The modifier or "Emod" is a factor calculated from actual case loss experience, as reported on the unit statistical reports, used to adjust an insured's manual premiums (up or down). It compares the insured's experience to average class experience related to the same industries.

Workers' Compensation CLaims Costs- 3 Categories:

1. Paid Losses:
   Money spent on a claim
2. Reserved Losses:
   Money set aside (outstanding) for future payments
3. Incurred Losses:
   Combined total of paid plus reserved amounts

What is the Lowest Experience Modification Rate Possible?

Each state will have specific elements that will affect the lowest possible Emod in that state. The lowest experience modification rate we've seen was an agency customer in California. Their mod rate was 0.48; so they were achieving significant savings on premium. This client had several million dollars in payroll and generated an annual premium over $250,000. They had no prior claims in an industry that normally has a frequent number of claims- hospitality.

As an agency, we've worked with client Emod's well over 2.00. Most commonly, we see a range of mod rates between .80 and 1.50.

What Affects your EMR Rating?

Think of an experience modification rate a a look back at your coverage history. Three years of policy information is used when calculating the EMR Ratings of each Rating Effective Date. The most recent past policy is excluded. Experience rating is only looking at the 3 years of coverage prior to the most current past policy. Therefore, a 2020 Emod would be based on policies that expired in 2018, 2017 and 2016.

Their are 3 important thing to consider when trying to understand how experience modification factors are influenced:

• Premium
• Overall cost of losses or claims
• Frequency of losses or claims

Premium is an important factor because it impacts the ratio between expected losses and actual losses sustained during a policy period. Expected losses are the average expectations for the cost of claims during the policy. Ultimately, the goal is to have actual losses come in under expected losses. This will generate a credit modification factor below 1.00. Frequency is also part of the equation because it increases the odds of having an expensive claim.