Rating Elements used in the calculation of an Experience Modification Rate or EMR are the individual pieces that when put together in a rating formula generate an employers Experience Mod Rate. These elements include the ELR, D-Ratio, Weighting Factors, Ballast Factors, Codes, Payroll, Claims and more. But if you need help today with an Experience Modification Rate problem be sure to check out our Experience Modification Rate Review.
On this page we will take the mystery out of the seemingly secret rating elements and you will learn detailed information about what they are, where they come from and how they fit together in the EMR rating calculation. You will learn about the interdependency of these elements and hopefully start to see how all the parts of workers compensation experience rating comes together.
A Rating Element Overview -
Each individual element used in the calculation of an Experience Modification Rate plays it's own important part in the development of that rate. All parts work together to produce an accurate experience picture of an individual employers workers compensation program. At this point it's important that you remember the reason for experience rating is to provide a specific premium adjustment on an employers workers compensation policy that reflects that individual employers actual loss or claim history. Experience rating is important to the stability of the entire workers compensation system so visit our page on Experience Rating to learn more about the whole system and how it works.
Below you will find a listing of rating elements with detailed descriptions of each one, what they are, where they come from and how they fit into the rating formula.
Audited Payroll - A Rating Element:
Payroll that's used in the EMR is taken from an employers workers compensation audit. workers compensation audit. The audit will show actual payroll incurred as assigned into individual classification codes on the employers policy. The allocation rating payroll into the correct class code is critical to the accuracy of an experience mod rate. It's the rating payroll that when multiplied by the ELR or expected loss rate determines the expected losses for an individual employer. As we go further into these elements you will begin to see how all the parts work together. Most employers are singularly focused on their workers comp audit. Rightfully so but the accuracy of an employers workers compensation audit is more important than just getting the additional or return premium correct! Incorrect audits can have a huge effect on the accuracy of the EMR calculation.
Classification Codes - A Rating Element:
Class codes determine the proper ELR and D Ratio that are to be used in the calculation. Each independent rating bureau, including the National Council on Compensation Insurance, NCCI, will publish updated experience rating elements by classification code every year. Class codes used in development of the EMR are reported to the rating bureau and when incorrect codes are used on a policy the calculated EMR will be incorrect. You may actually consider the use of a correct code as the starting place for correct experience rating! Check out our class code review service if you believe the codes used on your policy are wrong.
Experience Period - A Rating Element:
The experience period is that period of time that loss or claim data and payroll data is gathered from and applied to the rating formula. The experience period is typically four years looking back from the Experience Rating Effective Date excluding the most recent year past. Experience periods may include data from multiple policies that were effective during the period. Many times the experience period is stated as a number of months or days. You may find this period different from rating bureau to rating bureau. But the one thing they all have in common is that only the information gathered from the experience period is used in development of the EMR. For more detail on the Experience Period.
Actual Incurred Losses - A Rating Element:
Actual Incurred Losses is exactly what it sounds like. It's the total claim valuation including medical and indemnity or lost wages reported to the rating bureau under the rules of experience rating plan for a specific state. A consideration is the effect the Experience Rating Adjustment, as discussed above, has on medical only claims and the claims limit as established and applied for each individual state. Yes, claims have a maximum limit, as established and approved by individual states, that can be included in the EMR calculation. But this rating element can be described as the actual claims that an employer incurrs within the experience period. Did we mention that these claims include actual paid dollars but also include those dollars the insurance carrier anticipates paying in the future? This is known as a claim reserve, those dollars set aside for future payment. And yes, reserves are included as actual losses.
Actual Primary Losses - A Rating Element:
Actual Primary Losses are determined by the Split Point in use at the time for the State the EMR applies. Remember from above how the Split Point in NCCI states was previously set at $5,000 but is on an increasing scale up to a new maximum of $15,000? It's this State approved number that determines the difference between Actual Primary Losses and Actual Excess Losses. The importance here is that the higher the Split Point means that more claim dollars are being considered Primary which in turn leads to a greater impact on the resulting EMR. Remember, Primary losses have a greater effect on the EMR than Excess Losses.
Actual Excess Losses - A Rating Element:
The difference between Actual Incurred Losses and Actual Primary Losses. It's Excess and Primary Losses that go into the experience rate calculation.
Expected Losses - A Rating Element:
Expected Losses are those losses calculated by multiplying the ELR by audited payroll by class code. Read more detailed information about Expected Losses on this page of our website. Remember from above? Each class code carries it's own ELR as statistically developed by the rating bureau, published and updated each year. So when this factor is applied to an employers payroll it will develop the expected losses for that specific employer by code.
Expected Primary Losses - A Rating Element:
Expected Primary Losses are calculated by taking the D Ratio times the expected losses. An EMR calculation will split losses between actual and expected and between excess and primary. Experience rating utilizes a split rating method. We mentioned it before but primary losses are given more weight than excess losses and as part of the calculation expected primary losses are compared to actual primary losses in the formula.
Expected Excess Losses - A Rating Element:
Expected Excess Losses are then the difference between Expected Losses and Expected Primary Losses. Just like above, under split rating, it is important to compare Expected Excess Losses with Actual Excess Losses. Excess losses, while weighted less than primary, must still be considered as there can be significant claim dollars involved. All excess losses are relevant and are an identifier of severe claims. Throughout the rating formula you will find that the identification of frequency of claims has historically been given more weight than those severe claims.
ELR - A Rating Element:
The ELR or Expected Loss Rate is a statistical factor developed by the rating bureau for each classification code. This is a factor that represents all loss and claim data compiled throughout the entire workers compensation system for an individual class code. When multiplied by the payroll for a specific code it will develop the expected losses for that code. Expected loss rates are adjusted each year by current data provided to the rating bureau by member insurance carriers. The higher the expected losses for a code means that higher incurred losses by an insured will have lower effect on their EMR. The converse is also true.
D Ratio - A Rating Element:
The D Ratio is known as the Discount Ratio. This factor is a statistically developed factor that when applied to the calculated expected losses develops the expected primary losses as used in the rating formula. Typically the higher the D Ratio the lower the Experience Rate. One of the basic ideas of experience rating is splitting primary losses from excess losses and it's the D Ratio that establishes the Expected Primary Losses. A separate D Ratio for each class code is developed for use.
Split Point - A Rating Element:
The split point is that dollar point where actual losses incurred are split into primary and excess losses. Primary losses impact the calculated EMR much more than excess losses. There's been a ton of information written about recent changes in the split point. For those employers in NCCI states, the split point is being moved from $5,000 to $15,000 with implementation already underway. The published effect this move was to have was that of increasing EMR's for those employers with more claims and decreasing the EMR for those with fewer claims. The apparant actual effect has been that of a much larger swing in EMR. Supposedly other adjustments in the rating formula were to soften the increases the change in split point would make however we've seen large swings occur for employers previously claim free but who had incurred a loss. The reasoning was sound for an increase as the last time it was adjusted was somewhere in the 1980's but the full effect will not be understood for awhile. The typical implemention scale is over a 3 year period and by now we are well into that approaching the $15,000 level. As a final note about the split point, individual states had to approve the NCCI change. Other independent rating bureaus also use the split point in their calculations with similar results. For more reading on this topic search our Blog!
Medical Only Discount - A Rating Element:
Most states have approved some type of procedure to reduce the effect medical only type claims have on the Experience Rate. Known as an Experience Rating Adjustment program the typical state will reduce those claims by 70%. Reasoning behind this is that medical only claims present a single event injury and do not create a burden on the system. Think of these as first aid type of injuries where the injured employee has no loss time and is able to continue work. These type of claims eliminate the long tail of the typical workers compensation claim which justifies the reduction of value being included in the EMR calculation.
Weighting Factor - A Rating Element:
This statistically developed factor is used to determine the percentage of excess losses to enter the EMR calculation. It is applied to both actual excess losses and expected excess losses. You will find that this value increases as expected losses increase causing larger risks to have more emphasis placed on their actual excess loss experience than smaller risks. In real people terms, the larger the employer the more their actual losses have an effect on the EMR calculation.
Ballast - A Rating Element:
This statistically developed factor is used to reduce the swing in the EMR. It keeps the calculated EMR from extreme shifts either above or below 1.0. Ballast is determined from rating bureau published information and is varies depending on the employers expected losses.
How Rating Elements Fit Together -
Experience Rating is a complex multi-part calculation whose accuracy is dependent upon individual parts working together to generate an individual rating factor representative of an individual employers loss or claim experience. The examples we are using are not from a NCCI state but rather from another independent state rating bureau. While there are differences, some significant, most use very similar rating methods to come up with the final experience modification rate.
Once rating data has been compiled and applied to the rating formula you end up with a rating schedule similar to the one shown below.
You calculate this Experience Rate by dividing the Actual Total by the Expected Total. As you can see the Expected Total above is 56,012 and the Actual Total is 58,839. In this case Experience Modification Rate calculates out to be a 1.05.
What if the Actual Total came in at 40,000? Then the calculated EMR would be .71. And that's the relationship between Expected and Actual!
Here's What We've Learned About Experience Modification Rating Elements -
They are dynamic, they change from year to year because of annual adjustments made by the rating bureau or employer generated data used;
Data information gathered and formula concept is similar for most rating bureaus;
They are complicated, many individual parts must work together to generate an accurate EMR;
There are many areas of potential mistakes and errors;
Accuracy is dependent upon the accuracy of an employers Payroll Audit, Classification Codes and Claim or Loss Experience;