What is the Experience

Modification Factor? Part I by Steven A. Odell

Workers Compensation is a class-rated insurance program. Several states have their own rule and rate making bureaus. Within each state, insurance companies apply the same rate to all While these are officially independent bureaus, they all share employers who fall into a given class. For example, all plumbers some statistical, administrative, and rule-making functions are subject to the plumbing rate, all truck drivers are subject to the with the NCCI. These “Independent Bureau” states are divided truck driver rate, etc. The rate applied in each class is an average into two groups. The first are members of the NCCI’s rate, and does not recognize any individual characteristics of the Interstate Rating Bureau. Employers in these states are employer. Because of this, there is a need for a statistically interstate- (multi) rated when they conduct operations in supported means of differentiating one business in a given class another state that is also a member of the Interstate Rating from another for the purpose of determining policy premiums. Bureau. These states are , Massachusetts, Minnesota, This is where experience rating comes in. , , Ohio, and .

Since no two employers in the same industry will have similar The second group of states consists of , , claims histories, fairness requires that the employer with the , and . Employers in these greater claims burden pay more. Not only will that distribute states are always intrastate- (single-state) rated. They are not the cost of this insurance more equitably; it also places the members of the Interstate Rating Bureau. While the underlying employer that is less safety conscious at a competitive formula in their experience-rating plans approximate the disadvantage. NCCI’s own formula (except New Jersey, which is unique, and Michigan, where the formula is at the discretion of the The experience modification factor (a.k.a. experience insurance carrier), there are some differences. These modifiers modification rating, or EMR, or the mod) therefore provides are never calculated with payroll or claims from another state. employers with the financial incentive to improve the safety of If a company has operations in one of these states and also has their workplaces. When someone knows that he or she will operations in a NCCI or independent bureau state, their policy have to contribute toward the cost of their claims, they are will contain two different modifiers (provided premium levels more inclined to operate a safe workplace. qualify for a modifier).

The mod is an adjustment that is made to the workers The mod is affected by small losses more than by large ones. compensation premium of companies that meet or exceed a A company with one $25,000 claim will do better than one certain size. The minimum “manual premium” can vary from with five $5,000 claims. This is because small losses are more state to state. The employers that qualify typically have been frequent and predictable than larger ones. paying $5,000 for the past three years or have paid $10,000 or more in a single, recent year. The portions of all losses that are less than $5,000, which are termed “primary losses,” have the greatest influence in The mod factor is a value that compares the payroll and loss determining the experience modification. Losses in excess of data of that particular employer to the average for all other $5,000 are capped at levels that vary by state. The amounts of employers who share the same class codes. A value of 1.00 is each loss over $5,000, and below the cap, are termed “ratable “Average” which means that the frequency and severity of excess losses” and given increasing importance in experience actual losses equaled the expected losses. A mod factor over rating for larger employers based on the level of their expected 1.00 means that employer had worse than expected losses losses. during the rating period. A mod less than 1.00 means the employer’s losses were better than expected. Most states have approved a 1998 adjustment to experience rating that uses only 30 percent of ratable, “medic al-only” The mod is calculated by using claims and payroll data from claims in the experience-rating formula. This change was the four previous years, excluding the most recent. For made to increase the incentive to report all claims by example, to determine a 2006 mod, payrolls and claims from decreasing the sensitivity of experience rating to small claims 2002, 2003 and 2004 will be included. The data from the 2005 that involve no lost work time. All claims should be reported policy would not be considered until the 2007 mod when the for record purposes only, but self-paying of small, medical data from 2002 would drop off. only is acceptable by many carriers.

A common misconception is that the mod is calculated by the My next article will address some commonly asked questions state or the insurance carrier. Mods, are calculated in most about the mod and what can be done to reduce it. RSS states by the National Council on Compensation Insurance Steven A. Odell is the Chief Executive Officer of Odell Studner. He (NCCI). NCCI is a private corporation created and funded by can be contacted at 484.586.3902, or by email at member insurance carriers. [email protected] or visit www.odellstudner.com.