Contractors, Construction Project Owners and Managers typically use the Experience Modification Rate, EMod, EMR or Experience Modification Factor as a tool to measure the effectiveness of another contractors safety program. It’s used it to pre-qualify contractors who may act as subcontractors to the owner, manager or primary or general contractor. They use it as an eligibility benchmark of safety. Often relying on it as a single qualifier to the effectiveness of any individual contractors safety record. It’s common to find in construction bid situations an Experience Modification Rate (EMR) pre-qualification requirement of 1.0 or less, in place, in order to bid on a project.
Sounds like it should work right? Requiring a contractor to have a 1.0 Mod or less should be a good indicator of how safe they run their business. Right? But there’s a problem…this is a flawed way of thinking!
You see, the Experience Modification Rate or EMR is designed only as a premium modifier, not as an indicator of how safe a business performs its operations. There are better, more acurate ways of doing that. And while claims do play an important part in the rating formula, they are not the only factor considered. The primary purpose of experience rating is to determine a more accurate premium for a given workers compensation policy by modifying the base premium.
Items that impact the EMR:
- Job Classification Codes;
- Payroll;
- Experience Period;
- Frequency of Claims;
- Severity of Claims;
- Large Loss Limitations;
- Medical Only Discounts;
- Excluded Losses;
- Modifications or Changes to the Rating Formula;
The basic EMR formula: Actual Losses / Expected Losses = EMR. Actual losses will include reserves established by the insurance company for future payment of open claims; will be subject to discount factors applied for primary and excess losses and will be subject to loss limitations for large, severe losses. Expected losses are calculated and impacted upon by payroll size.
Here’s a few reasons why the EMR is not a good current safety indicator:
- Experience Period: The experience period, usually three years, does not take into account the most recent year of claim activity. A contractor with a .90 EMR may have had last year a series of significant claims or maybe just a frequency of small claims, but enough to cause their EMR to go above 1.0. Qualifying for a contract today and using the EMR, which is developed from a three year period starting two years ago, does not give an accurate reflection as to the effectiveness of a current safety program.
- Open Claim Reserves: Claim reserves established by the insurance company carry over from year to year. This is the amount that an insurance company thinks they will have to ultimately pay for the claim.
- Subrogation Effect: Large workers comp claims may be drawn out over many years and subrogation on workers comp claims, when successful, may not occur for many years past the EMR experience period, usually three years, causing any reductions to reserves or credits due to subrogation to not be reflected in the current EMR.
- Non-Specific Work Claims: Claims may occur that do not reflect work or safety conditions. For example automobile accidents where the injured employee was not at fault creates a potential subrogation effect but the initial claim will impact the EMR.
- Formula Calculation Changes: Rate making authorities are constantly modifying EMR formulas to better represent changing economic conditions. A change in the way the formula is applied or a change in the formula factors may have a negative impact on an EMR without any cause or imput from the employer. Split point changes by NCCI to their EMR formula now effective may have this effect on many employers.
- Payroll Reductions: One of the factors in determining Expected Losses is payroll. When a contractor has reduced payroll, for whatever reason, there will be a likewise increase in their EMR.
- Contractor Incurrs No Losses, EMR Increases: Yes it is possible for a contractor to have had no losses during his experience period, three years, and still have his mod increase! Remember, multiple factors are considered within the EMR formula. Any combination of these may cause the increase. Certainly when payrolls are down, advisory rates are down, base rates and expected losses have decreased you can expect to see a gradual increase in the EMR.
There you go. Should the EMR be used as a construction safety indicator? Are there too many unrelated claim variables to be accurate for this purpose? Are there better, more responsive indicators that should be used to determine the effectiveness of a construction safety program?
Wow! More questions that I started with! Sorry about that!
Hope in some way this helps you out!
Thanks!
