Experience rating of a workers compensation policy involves many small individual, seemingly unrelated, parts comming together in one place. The key here is “seemingly unrelated!” In fact, each individual rating factor used in any experience rating formula is there for a reason. Its accurate use will make an impact on the rating outcome. Let’s look at the relationship between codes and EMR’s.
Classification codes are elusive. Most employers are aware that there are many different codes and that the premium they pay is based on the codes used on their workers compensation policy. Many employers look for justification to have a lower rated code used on their policy. Many audit disputes revolve around this very idea. And in many cases improper payroll assignment or reassignment into higher codes, at audit, is incorrect. But there’s another, less told story about the effect codes have on the premium an employer pays. It’s the forgotten effect codes have on experience rating.
A big part of experience rating is the comparison of an individual employers incurred claims to expected claims. Expected claims are statistically developed for each code and identified as the expected loss rate. The expected loss rate is then multiplied by the audited payroll for each class code that applies to an individual employer.
As a general rule of thumb, codes that carry a higher premium rate per 100 of payroll will will also carry a higher expected loss rate. Claims incurred on an employer with a higher expected loss rate will make less of an impact on their experience rating. Get it? When the expected loss rate is higher that simply means that the formula expects more claims.
Here’s a simplified example (used for illustration purporses only):
- Employer A operates a chain of hardware stores. Their premium rate per 100 of payroll is $3.32. Their expected loss rate is 1.89. Their audited payroll is $200,000. Expected losses = $3,780 and policy premium = $6,640.
- Employer B operates a roofing business. Their premium rate per 100 of payroll is $32.71. Their expected loss rate is 13.04. Their audited payroll is $200,000. Expected losses=$26,080 and policy premium = $65,420.
Please note this example is not a real life example but only to illustrate the relationship of expected loss rate, rate and premium.
My point here is that different codes carry different expected loss rates. Using the wrong code on a policy will translate into an incorrect experience modification rate. And in the bigger picture using incorrect codes skews the whole statistical picture used to generate ELR’s and rates per code in the first place!
Hope this helps you out! Thanks!