How One Claim Can Spike a Workers Compensation Experience Modification Rate (EMR)

In the past, you’ve always been able to depend on that if an employer suffers a shock loss to their workers compensation program that the resulting effect on their EMR or experience modification rate would be softened. The old rule of thumb was a large single loss would not have as great an impact on the mod calculation. Things change! Modifications in how an employers workers compensation EMR is developed can now result in serious increases that have a devastating effect on some employers. Lets take a look!

It’s no secret that our firm works on EMR problems. Employers contact us when things have gone wrong. Most of our work is centered on the verification of increasing mod factors and working with employers and their agents in developing plans for re-gaining control of these costly, deteriorating experience factors. Because of our extensive work in this area we are constantly exposed to examining and evaluating a variety of different employer EMR circumstances. We get to see the effects claims, payroll, classifications and changing operations make in the calculations. Because of this we often receive calls from employers who have experienced a single claim only to find their EMR has increased 15% to 30% and more. How’s this possible?

Experience mod calculations are complicated. A variety of rating factors are gathered together, plugged into the EMR algorithm with the result being an employers experience modification rate or EMR.

Let’s take a look at a couple of specific cases.

Our first case involves a typical construction operation. Here are some facts about this employer:

  • In business for 25+ years;
  • Operating under the typical codes you’d expect to find in this type of business including 5645;
  • Stable to growing payroll in the $550,000 range;
  • Pays all medical only claims (they are allowed to do this in their state)and files a report only on those;
  • Management is actively involved in daily safety;
  • 2015 EMR showed no claims in any policy period included in their 3 year experience period.
  • 2015 EMR = .82
  • 2016 EMR shows 1 claim in the most recent policy period included in their 3 year experience period with a total value of $44,000;
  • 2016 EMR = 1.08
  • Current Split Point = $16,000
  • Perfect EMR for this Client = .78

That’s a .26 increase in this employers EMR for one claim!! Translated to English, this means if the employers premium was $50,000 last year using .82 it would be $63,000 this year using 1.08. Does that seem extreme?

So let’s take a look at the calculations in this case.

Class code 5645 carries an expected loss rate or ELR of 5.64. That means that for every $100 of payroll $5.64 represents the expected losses as statistically generated for this classification. This generates $19,038 in expected losses for this employer in 5645. After you run similar calculations on the remaining class codes 3069, 3724, 5535, 8742 and 8810 the total expected losses for this client come in at $38,638; Primary expected losses come in at $10,885. All with a total experience period (3yr) payroll of $1,754,134.

One significant rating factor that has changed a great deal over the past few years for employers in many states is thesplit point.” This factor is the point where, in the calculations, primary expected losses are separated from expected losses. (This causes more emphasis to be placed on those smaller losses.)The split point number is different in different states and for many years, the split point in the state where this employer is based was set at $5,000. Because of modifications in the rating factors, the split point for this employer is now set at $16,000.

What happens to this employer if the split point had not changed from $5,000?

In our  example, leaving all remaining rating factors the same and reducing the split point back to $5,000, this employer would now have a current EMR of .94 not 1.08. Of course this is an inaccurate, simple change in the calculation where none of the other rating factors have been adjusted. But it does give you an idea of the effect changes in the split point have made on EMR calculations.

Now let’s look at how this single claim affects this EMR calculation.

What would the EMR look like if different claim values are applied? Let’s change the calculation by reducing the current $44,000 claim and replacing it with $30,000, $20,000 and $10,000.

Here’s how the current EMR would look using these different values:

  • $44,000 = 1.08 EMR
  • $30,000 = 1.04 EMR
  • $20,000 = 1.02 EMR
  • $10,000 = .93 EMR
  • $0 = .78 EMR (This is what we call the perfect mod for this employer. A situation where there are no claims presented during the entire 3yr experience period.)

Notice how when we use the $10,000 claim value it drops below the $16,000 split point and has the greatest reduction in the experience mod? Could there be a better example of how claims impact the experience modification rating factor?

Now let’s take a look at our second case. This case involves a small, rural, metal goods manufacturer. Here are some facts about this employer:

  • An employer operating within a single state;
  • In business for 10+ years;
  • Reports all claims and pays small medical (allowed in this state);
  • Has an organized safety program;
  • Steady to increasing payroll growth in the $360,000 range;
  • 2016 EMR shows 1 claim valued at $140,135 in the oldest of the three year experience period;
  • 2016 EMR = 1.36
  • Current Split Point = $16,000
  • Perfect EMR for this Client = .84

This employer has gone claim free in the last three years and will have the single claim of $140,135 fall out of their experience period on the next EMR effective date. This action will reduce their EMR next year to near .84! That’s a .52 reduction in their experience mod which will significantly reduce the work comp premium they pay!

Think about it. If this employer was paying a premium of $50,000 at the 1.36 mod, next year they will be looking at a premium of $26,000! Good news for this employer!

In this case the employer can see the end of the tunnel unlike our first example where the employer is just beginning the three year experience cycle.

Keep in mind this employer’s operation is in a different industry. That means the EMR calculation will use entirely different expected loss rates, ELR and discount rates or D-Ratio’s. For example, the ELR used on the classification code with the largest amount of payroll is 1.77 as compared to our first case example where code 5645 carried an ELR of 5.64. So in this case our employer has a lower expected loss rate. This is significant in driving their EMR to 1.36.

Everything we outlined in the first example also applies to this client. The affect the split point has had on their calculations are similar.

So let’s jump in and take a look at how different claim values would change the EMR in this case.

Let’s change the calculation by reducing the current $140,135 claim and replacing it with $100,000, $60,000, $30,000 and $10,000. Here’s how the current EMR would look in this case using these different values:

  • $140,135 = 1.36 EMR
  • $100,000 = 1.30 EMR
  • $60,000 = 1.24 EMR
  • $30,000 = 1.20 EMR
  • $10,000 = 1.05 EMR
  • $0 = .84 EMR (Again, this is what we call the perfect mod for this employer.)

While the trend is similar, lower claim value equates to lower EMR, I’m sure the first thing you’ll notice is the difference between this case and the first.  This again emphasizes the difference between different employer operations. The first case carried an overall higher expected loss rate than the second case, which is one of the factors leading to the higher calculated EMR’s for similar claim values shown in the above example.

So what’s the take away?

  • Regardless what you may have been told, experience modification factors or your EMR can be volatile and subject to very large swings in value!
  • It is true that a single workers compensation claim can create a devastating effect on an employer’s EMR.
  • Similar claim values will have different effects on different employer EMR calculations.
  • Future changes in EMR rating factors can add to large swings in an employer’s EMR.
  • You must stay on top of all workers compensation claims! Never believe that a single claim won’t make a big impact on the premium you pay!
  •  Be sure to contact an independent workers compensation consulting firm when you’re faced with extreme changes in your experience mod or EMR!

I hope you can find some useful information in this post! Please keep in mind that EMR’s are complicated. That most folks don’t understand the methods and formulas used in developing these often volatile rating factors. That mistakes are made in data used in their calculations. And that when you find yourself faced with an ever increasing EMR, claim handling problems or other issues driving your mod higher and higher make sure you contact an independent work comp consultant! They may be able to help!

Thanks for reading!