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The Experience Modification Factor

How It Impacts Your Workers Comp Costs

It’s not a secret: many, if not most companies, have as much understanding of their Workers Compensation Experience Modification Factor, as they do Sumerian. Not much is known about how it affects the calculation of premium which is intrinsically tied to how much they pay for their WC coverage.

Be sure to check with your agent to confirm the amount of time included in the Experience Mod because it can differ if the WC policy renewal is changed. All existing classifications, from mail clerk, manager to sales person or foreman have an expected loss rate. This rate is the money an insurance carrier can expect to spend for each injury an employee has and it is a percentage of every $100 of payroll.

So, if you are expected to have $1,000 expenses for an employee’s injury, you will have a loss rate of 1.0 for every $100,000 in payroll costs. If it’s less than this, your Experience Mod drops below 1.0; more and it goes above 1.0. Your Experience Mod multiplies the base premium you pay.

In our experience as WC premium auditors, the vast majority of employers don’t have this rudimentary information about the Experience Mod nor the road the insurance carrier takes to arrive at it, much less what can be done to adjust it.

There are four things employers want to keep in mind about their Experience Mod that will begin to help them containing their WC costs.

One: The frequency of accidents will cost you more than the severity. The Experience Mod will be more affected by ten $5,000 injuries than one sole injury costing $50,000. The first $5,000 that’s spent on an employee injury is counted dollar for dollar so that all 10 claims will have a deeper impact on the Experience Mod. On one $50,000 injury, all of the first $5,000 (100%) is counted but only between 4% - 80% of the remaining $45,000 is counted. The percentage depends on the total amount the insurance carrier expects to pay out on an employer’s employee injuries over a 3-year period.

This is not to say that severity is not important. However, when frequency and severity are coupled, employee injury severity will be making the WC premium more costly because of its larger impact on the Experience Mod. This is why employers that have safety programs, reduce the frequency of on-job injuries and that have a return to work program will generally pay lower premiums for their WC.

Two: Your Experience Mod, as a point of comparison, is derived from the same industry as yours. If you’re a construction foreman, for instance, the Experience Mod is derived from other construction companies. This is why it’s important to make sure your employees are correctly classified.

Three: Just because your Experience Mod is less than 1.00 does not mean all is ok. It’s a mistake to assume that if this is the case, the Experience Mod can’t be lower. You would be wise to know what the minimum Experience Mod is for your company and aim for that. So, say you’re Mod is .85 but the minimum Mod is .61, this means that .24 of the Mod can be controlled. With a $100,000 premium, lowering the Mod to .24 can save you $24,000. Even lowering a few points can save you money over the long term. Don’t settle for anything less than the minimum Mod or as close to it as you can.

Four: Your insurance carrier isn’t paying your employee’s injuries. Claims are paid for by the employer through the Experience Mod, quite often at 200 – 300% interest! Depending on the state, there’s a point at which an employee’s injury stops impacting the Experience Mod. With a very large claim, the carrier does end up paying the bill but in most cases the carrier is just temporarily financing the payout on the employer’s behalf.An employer can’t really be expected to know all there is to know about Experience Modification Factors. Heck, even most insurance agents are in the dark about how it works. Yet, even the most basic knowledge about it can go a long way in the long run toward saving you hundreds, perhaps even thousands of dollars in Workers Compensation costs. And what would that money mean to your company’s revenue?

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