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Experience Modification Rating - The EMR, EMOD and XMOD

Helpful information on how to manage this workers compensation premium factor

The Experience Modification Rate, EMR or the EMR Rating, is a rating factor applied to all experience rated workers compensation policies. It can have a great impact on premium an employer pays. You can verify that the EMR, EMOD or XMOD used on your policy is accurate through a Experience Modification Rate Review. This factor is developed each year that an employer qualifies by applying data gathered for the experience period from the employers insurance company to the experience rating formula. In simple terms, this formula is designed to compare a specific employers historical claim and payroll data to other employers with similar business operations. It is the mechanism used to adjust workers compensation premium an employer pays based on the comparison of their expected losses to actual losses incurred during the experience period. The EMR is an important premium adjustment factor. It rewards employers who better manage their workers compensation claims with lower premiums. It punishes those who have little or no control over claims with higher premiums. An out of control experience mod rate can devistate a business. So it's important to learn all you can about your EMR!

On this page you will learn detailed information about the Experience Modification Rate, also known as the EMR, EMOD or XMOD, what it is, how it works and what an employer can do to gain control and better manage this important workers compensation rating factor.

The Experience Modification Rating System -

Experience rating of insurance policies has been around for many many years. While each system may have its similarities the system used to produce the EMR, XMOD, EMOD or Experience Modification Rate is unique to the workers compensation world. It is a system in place that compares a single employers loss history or loss experience with those other employers who share the same type of work processes. Soon you will see how all the Individual Parts or Rating Elements of generating a workers compensation rate per classification code work together to tailor the individual premium an employer pays for this coverage. The ERM factor is produced by the rating bureau or advisory organization used in the state where an employer conducts business operations. Most states subscribe to NCCI, the National Council on Compensation Insurance to provide rule, rate making and other statistical services. Not all states use NCCI.

Interstate Experience Modification Rate -

This is a workers comp term that refers to a workers compensation experience modification factor that applies to employers who conduct operations in multiple several states where NCCI is the rating bureau. This factor is applied to each individual states manual premium to calculate the premium to be used on the policy for that state or to develop an overall combined multistate policy premium.

Intrastate Experience Modification Rate -

Intrastate Experience Mod is a term used in the world of workers compensation that refers to a workers compensation experience modification factor that applies to employers who conduct operations in a single state where NCCI is the rating bureau or authority.

An Experience Modification Rate Example:

Two large construction companies who perform the same type of commercial building work are competitors. These employers bid on many government contracts. Both companies have the same number of employees and the same payroll. One company has had multiple workers compensation claims finally driving their Experience Modification Rate or EMR to 1.40 causing them to no longer be able to bid on government jobs, to lose out on bidding on large commercial projects and virtually putting them out of business. That's the power of Experience Rating!

The Experience Rating System and NCCI:

The National Council on Compensation Insurance, NCCI, is an independent advisory organization who has developed and maintains the experience rating system used in most states. Rules of experience rating are copyrighted and published by NCCI in their Experience Rating Manual and are only availabe for use to subscribing members.

Monopolistic States use NCCI in an advisory capacity only. All other States, that do not use NCCI, have their own independent Experience Rating systems in place. Manuals, rules and procedures for experience rating are controlled by the individual advisory organizations used by these states. While all have similarities to the system used by NCCI most have developed their own rating formulas and you'll find are different in the way they apply experience rating in their state.

States where the NCCI Experience Rating Plan does not apply:
  • California
  • New York
  • Delaware
  • Pennsylvania
  • New Jersey
  • Michigan
  • Minnesota
  • Wisconsin
  • Texas

Sample Experience Rating Formulas -

A simplified version of the formula used by NCCI:

Actual Primary Losses + Stablizing Value + Ratable Excess = Total Actual Primary Losses _______________________________________________________

Expected Primary Losses + Stablizing Value + Ratable Excess = Total Expected Primary Losses

A simplified version the Michigan formula:

Actual Primary Losses + Ballast + Weighting(Actual Excess) + Weighting(Expected Excess) _______________________________________________________

Expected Primary Losses + Ballast + Weighting(Expected Excess) + Weighting(Expected Excess)

A simplified version of the Pennsylvania formula:

Actual Losses(Credibility) + Expected Losses(Limitation)(Credibility) + Expected Losses(1-Credibility) _______________________________________________________

Expected Losses

As you can see there's a trend in these formulas. In their very basic form they compare Actual Incurred Losses with Expected Losses. Of course each formula is modified by their own Rating Elements which include ballasting, limitations, credibility and weighting factors. But the idea remains the same. And that idea is to compare an individual employers Loss Experience with an Expected Loss Value.

Establishing an Expected Loss Value -

Expected Loss Rates or ELR are a vital part of any rating formula. ELR's are statistically generated by the advisory organization in authority for the individual state in question. ELR's are determined for each published classification code. The advisory organization collects all claim or loss data as reported to them by member insurance companies for each workers compensation code. They then statistically develop an ELR for that class code. Expected loss rates change and are updated each year for use in the experience rating calculation.

Expected Losses are then developed by multiplying the ELR for a given class code by the audited payroll assigned to that code as reported to the rating bureau by the insurance carrier.

Actual Losses -

Pretty much what you think they are. Actual losses are the actual losses an employer has incurred. Let's clarify, claims and losses mean the same thing. In some jurisdictions claims may be limited. For example in many states you'll find that medical only claims are discounted 70%. The idea behind this is that a medical only claim will not be a continuing burden on the system and that first aid type claims can be discounted.

The Experience Modification Rate or EMR is then a comparison of actual claims incurred by an individual employer against the expected claims they should have incurred as generated statistically from compiled loss data by the type of work being performed by the employers employees.

Experience Period -

A sliding scale experience period is used for all experience rating calculations. This period is a bracketed time period in the past in which claim, payroll and classification data is complied and applied to the formula. Experience periods skip the most recent year past and are typically composed of three years. Remember, it's a sliding scale. It changes every year. Old experience, that from the oldest year in the experience period fall out of the calculation and are replaced by data from the newest year entering into the experience period.

Experience Modification Rate Experience Period Timeline

This timeline example shows how older policy periods and claims for those periods move through the experience cycle and will evidently fall off the calculation experience period and be replaced by new policy periods.

How Claims or Losses Effect the Experience Modification Rate -

It's pretty clear that workers compensation claims have a great impact on the EMR of any individual employer. As evidenced from our above EMR timeline example claims may come and go but their impact will linger for many years. As shown above a claim that just shows up in the 2010 policy period will first impact the 2012 experience mod and will continue to be included in the 2013 and 2014 calculations!

Excluding medical only or first aid type claims workers compensation claims typically have what's known as a long tail effect. Think about it. They are much more complicated than say an auto insurance accident claim where the insurance company pays the repair bill and walks away. No, a workers compensation claim involves not only the payment for medical but payment for lost wages or indemnity and final settlement. Payment of work comp benefits are guided by individual state legislation.

A typical claim that involves medical, indemnity, partial or permanant disability can take years to reach its full value. So when an insurance carrier is presented with a new claim they will call upon their experience handling similar claims to establish a claim reserve. This is what the insurance carrier believes they will ultimately end up paying for the claim. Think of a claim reserve as a sort of bank account where once established, each dollar paid out for medical, lost wages or settlement will draw down the balance in the account.

Workers compensation claim reserves are included in the experience mod calculation just like they were dollars already spent! Open claims with reserves, that's what the insurance industry calls claims that are still active, can always be adjusted. If a claim reserve was established to low, it may be adjusted up or if it was established to high it may be adjusted down. So it is essential that claims be reviewed for accuracy!

Open or active claims will work themselves through the EMR experience period. Adjustments made to reserves during the experience period will be included in the experience modification rate calculation and will impact the EMR developed for an employer.

Here's What We've Learned About the Experience Modification Rate -
  • Not all states use the same Experience Modification Rate formulas;
  • Most formulas are similar in concept but may differ greatly in details;
  • Experience rating is the comparison of an employers actual losses or claims to expected losses or claims;
  • Experience rating is used to develop a more accurate premium for an individual employer;
  • Many individual rating factors like payroll, ballasting, weighting, classification codes and claims go into the calculation formula;
  • Experience period typically spans four years back but excludes the most recent year;
  • Experience period is a sliding timeline and includes all claims incurred during that period;
  • Claims have a great effect on the Experience Mod Rate;

What Can An Employer Do to Control Their EMR or Experience Modification Rate -

The short answer is to never have a workers compensation claim! But that's not good enough. Here's some tips that may help:
  • Do you know your perfect EMR? - Let me answer. Probably not! Before you can judge just where your company fits on the EMR scale don't you think you shoud know your goal line? Most employers do not know their best EMR. But if you are going to get control over your specific situation you must know the number. Your perfect EMR is specific to your company. It is your calculation with no claims incurred during the entire experience period. It changes each year but you need to know this number.
  • Are your classification codes correct? - Rating factors for each class code are used to develop your expected losses. If your codes or payroll assigned to those codes are incorrect then your EMR is incorrect.
  • Verify rating factors. - Rating factors include codes, expected loss rates, split point, discount rates, weighting factors, ballast, credibility factors and many more seemingly unimportant items that when incorrect will lead to an incorrect rate. These items must be verified for accuracy.
  • Verify your experience period. - Claims, code, payroll and other rating data that fall outside the experience period should not be used. You must verify the data for accuracy.
  • Verify claims and losses. - Closed claims, those that have been settled and open claims those that remain active must be monitored for accuracy. Improper claims, non-compensible claims that are included and improper claim reserving all have a negative impact on your EMOD. Get a handle on your claims! Beef up your claim reporting and followup. Establish return to work programs and work with your injured employees to get them back to work as quickly as possible. Reduce payments and you'll help your EMR. Become an active participant in your workers compensation claims. Work with your insurance carriers claim adjusters.
  • Work with an Independent Workers Compensation Consultant! - When faced with Experience Modification Rate problems make sure you contact an independent consultant.

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