Post written by: Rick Cosenza, CPCU
Workers Compensation Master Underwriter
Experience modifications rating factors (EMRs) are premium adjustments that modify your premium positively or negatively based on your own loss experience. Rating bureaus calculate a modification applied to a premium based on the information reported by the insurance company. This information consists of payroll and loss information for the past three full years.
To be eligible for an experience modification, you must meet certain premium requirements that vary by state and are typically $5,000 to $10,000 per year for the last 24 months. An average modification is 1.0. Accounts with better than average experience than their peers will have a credit modification and will have a number less than 1.0. Those with worse than average experience will have a debit modification and a number greater than 1.0
In 2013, a major change was made in the calculation of modifications to reflect the increasing cost of a claim. The split point was increased from $10,000 to $15,000 and will be adjusted for inflation starting in 2016. The goal of this change was to reward those accounts with good safety programs, including the management of claims. Those accounts with worse than average safety programs will see the opposite effect.
The experience modification calculation is a rather complex formula. It can be divided into three parts:
- Medical only claims. These are the less complex claims and typically involve medical visits but do not result in any time off work or permanent injury. Claims of this type are reduced by 70 percent, so they have very little effect on your modification.
- Primary/ Lost Time claims. These claims have an element of lost time from work, permancy or death involved. They are used at 100 percent of value, thus they are usually the driving factor in your modification calculation.
- Severity/Excess Losses. Claims in excess of the split point ($16,000 starting in 2016) are referred to as excess losses and reflect the severity component of an experience modification.
The weights and credit abilities used for the primary and excess losses are calibrated to ensure the modification best reflects the loss history of the employer with respect to its classification. Primary losses are given a much greater weight, which serves as an incentive to reduce the frequency of Lost Time claims.
The best way to improve your experience modification is by controlling the frequency of Lost Time claims. Many employers believe they can reduce their modification by internally handling small claims. Because medical only claims are reduced by 70 percent, they have very little effect on the experience modification. Small claims frequently turn into large claims that may have been avoided with the proper care and supervision. Reporting all claims to your carrier allows them to properly investigate the claim, as well as potentially identify other conditions, such as a diabetic, that could complicate the claim.
The other area in which employers can reduce their claim cost is with a strong Return to Work (RTW) program. If you can bring an employee back to work with just medical costs, that claim is reduced by 70 percent. Even if that person has some lost time, an aggressive program will still reduce the cost of the claim and your modification. Over the long run, it’s usually more cost effective to bring employees back to work since the cost of a single loss affects your ERM calculation for three years. There are many benefits from a RTW program, but an employer should also ask itself, “Do I want to pay the injured employee to stay home, or do I want to pay him or her to be at work?”
For more information about how EMRs work and how you can improve your rating, contact your local independent insurance agent. For a list of agents in your area, please click here.
Do you have an interesting experience with your Return to Work program? If so, share your feedback in the Comments box below.