How can you tell if your Emod, EMR or Experience Modification Rate is too high? I was recently asked this great work comp question by a client who was pondering his ever increasing Experience Mod Rate and thought I could shed a little light on the topic.
To go forward, you must understand the who what and why of experience rating and how it’s application to an employers workers comp policy effects the premium. But the very first thing you have to know is that experience rating of a workers comp policy is specific to each individual employer.
An experience rating formula, the actual calculations that develop an employers Emod or XMod in California, is run on every individual employer who qualifies for experience rating. In a nutshell, the experience rating formula takes into consideration an employers claims (losses both paid and reserved), size of business (by use of payroll as a factor) and classification of the business (certain formula factors are classification specific) to establish an employers expected losses. It then compares the expected losses with those actual losses incurred over what’s known as an experience period, usually a three year period of time, to develop the Experience Modification Rate. This rate is presented as a factor with a neutral of 1.00. An employers premium is then multiplied by the EMR or Emod to come up with the modified premium, or what the employer pays for coverage.
Anything above 1.00 is known as a debit factor. Anything less is known as a credit factor. Here’s an example:
- Say an employer has had no claims over their experience period and their EMR or Emod is a credit factor of 0.85. His unmodified premium is $100,000. His modified premium, the premium he would pay, is then $100,000 x .085 = $85,000.
- Another employer in the same business with the same payroll and same unmodified premium but who has had many claims over their experience period has an EMR debit factor of 1.25. His modified premium is then $100,000 x 1.25 = $125,000.
In our example the first employer has been rewarded for a clean safety record, no claims or losses, with a great Emod while the second employer pays $40,000 more in premium than his competitor. See how that works?
How can you tell if you have a high Experience Modification Rate? You must look to your specific industry for the average employers experience. And then I think you have to answer these questions:
- High compared to what? If you are comparing to your industry average, which will be 1.00 then any Emod over 1.00 could be considered high. If you are comparing to the best performers within your industry, who may have very low mods, a 1.00 could be considered high.
- Compared to your own performance? Remember, experience rating is specific to each individual employer and their specific circumstance. No two employers have the same experience. So maybe a better question is how am I performing against myself? If in the past your company sustained claims and losses that drove up your EMR into the debit range, over 1.00, and now due to enhanced safety programs and more due diligence on your part you’ve improved it to a credit mod, you could consider your performance acceptable and the mod you have as improved.
Here’s a few more questions:
- Is your Experience Modification Rate out of control?
- Do you pay attention to the cost driver of your EMR, claims?
- Are you involved in the claim process?
- Are you getting the answers to questions you ask about your EMR and how claims effect your premium?
Unfortunately the answer to this question seems to be just more questions! But here’s the take away:
- Experience rating is specific to each individual employer;
- 1.00 Mod is the average for your specific industry;
- Every claim will effect your EMR;
- Your EMR will effect the premium you pay.
Be sure to visit our website for free information about workers compensation issues, to learn how workers compensation works and steps you can take to improve the performance of your workers compensation program. And if you are having a problem with your Experience Modification Rate, contact our office for help!
Hope this helps you out!