Experience Modification Rating, otherwise known as EMR, EMod or XMod, is and has always been a somewhat hot topic in the workers compensation arena. Maybe even more so today. We see experience modification ratings constantly being used for more than they were designed. We see contracting employers, who historically run safe work places, being penalized by inappropriate use and interpretations of the experience rating factor or EMR. Is it time to change the Experience Modification Rating method? Let’s talk a bit about the harsh reality that many employers face.
Workers compensation experience rating was developed as a method to fine tune the premium an employer pays to that individual employers workers compensation claim or loss history. To better understand this you must have a good understanding of the rate making process as used in establishing rates for use on individual workers comp classification codes. Class code rates are industry specific by each individual state. In other words each individual class code, in any given state, carries a rate that has been statistically developed by analyzing losses and claim dollars paid for all employers found within that individual class code. For example lets take welding or cutting NOC & drivers in the state of Arkansas. Code 3365 for Arkansas shows a published advisory loss cost of $4.42/100 of payroll. Keep in mind this is not the actual rate but only an advisory loss cost which is the statistically generated amount per 100 of payroll calculated to support claims for this class code. An insurance company will then take this rate and add their expense and profit loading to develop the final rate they will use for this class of business. As an example, the Arkansas Assigned Risk rate for this classification is actually $8.88/100 of payroll.
This rate then represents the statistically generated costs for all employers in this class code to:
- support the losses and claims for this class code
- support the insurance company expense plus profit
It does not represent the actual loss or claim experience of an individual employer. That’s what experience rating formulas do. They fine tune the general rate, as developed for the entire class of business, to the experience of an individual employer. Employers with better claim or loss results pay a lower premium which reflects their better experience. Employers with worse claim or loss results pay a higher premium which reflects their worse experience.
The experience period is typically a four-year look back with the most recent year past thrown out. So out of an employers entire loss history it’s these three years that come into play for calculation of the experience modification rate. ERM calculations are quite sensitive to any claim activity. The old adage that claim frequency has a greater effect over claim severity is still true. But the rating formulas are being constantly eroded. Maybe the word I should use is modified. For example adjustments to the split point, the point at which primary losses are separated from excess losses in the calculation formula, while much-needed and well over due, have had a negative effect on many employers.
Here’s the problem. The EMR or experience modification rate is being used, more and more, as a safety indicator. It’s being used as a qualifying factor for many organizations in their assessment of awarding or even qualifying an employer to bid on projects. Most government and commercial entities have some type of rule in their procurement procedures that will address some minimum acceptable EMR for an employer (contractor) to bid on a project.
In today’s contracting environment the EMR has become something it was not meant to be, a qualifier for work.
The harsh reality is that an employer in business for 25+ years who has had an excellent historical loss history, an employer who we would want on the job, may be precluded from even bidding because of a claim that occurred within that three-year experience period. Does that make sense?
Should the experience rating system be changed? I don’t believe so. It works for what it was designed.
Should attitudes towards its broadened use be modified? Hmmmm…something to think about!
Hope this helps you out! Thanks for reading!