Experience Modification Rate: Ways to Cut Costs on Workers Comp

The experience modification rate (EMR) is one of the key factors that can help you reduce workers' compensation insurance costs.

The EMR is an important metric used by insurance companies to measure a business’s risk and determine how much they should charge in premiums. It takes into account the number of losses a company has had over the past few years, as well as its current payroll size.

By understanding how this experience modification rating system works and taking steps to improve it, businesses can potentially reduce their workers’ comp costs significantly.

In this blog post, we'll explain an experience modification rate and provide tips on how small business owners can lower their EMR.

We'll also discuss why it's important to keep track of your EMR over time so that you can take advantage of any potential savings opportunities available.

If there is a specific cost-cutting measure you're interested in, you can jump ahead using the links below:

With all of these techniques for improving your experience mod rate and ultimately cutting the cost of your workers' compensation insurance, working with an insurance agent you trust is always a good idea.

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Review Reserves

Claims reserves are sums of money set aside to meet future payments associated with claims that have been incurred but not yet settled as of a given date.

The experience rating process counts claims reserves the same as paid claims. It, therefore, behooves an experience-rated organization to pay attention to the claims reserves used in the experience-rating calculation.

The carrier(s) involved during the 3-year experience period to be used is(are) required to report payrolls and incurred losses (paid claims and case reserves) for each year. In the older second and third years, carriers report any claims and claim reserves changes since the last experience modifier was calculated.

Reserves for unpaid claims count just as if they have been paid.

These losses are “valued” 6 months after the end of the policy period or 18 months after its inception. Therefore, for a May 1st renewal, the valuation date used to compute the experience modifier is November 1st.

It is best to negotiate an arrangement is by reviewing reserves before they are reported to the National Council on Compensation Insurance. The usual procedure is to meet with the insurance company's claims manager just before the 6-month evaluation.

Before the meeting, prepare an analysis of open claims. During the meeting, these outstanding claims will be reviewed with your agent, and the reserved amounts should be evaluated and adjusted based on the consensus. In some instances, the eventual outcome of many cases may be known.

Still, because it takes an carrier 90 days to process paperwork, the adjusted reserve may not yet be reflected in the insurance company’s records.

Shortly after the review, you should make changes as agreed in the meeting so the actual filings with NCCI will reflect the most current status of the claims.

Prepare a Test Experience Mod

A test experience mod is calculated similarly to any other modifier.

Your test experience mod is usually calculated from preliminary information that might or might not be complete and accurate.

Projecting the experience modification factor 6 months prior to the policy renewal can prevent surprises from changes in a modifier.

Having advance notice of impending adjustments to the experience modification factor allows you financially plan for any premium increase, strategize on promoting and advertising an improvement in its mod factor, or anticipate a new modifier that may impact its ability to bid on projects for the coming year.

This process also allows you to develop a renewal strategy with your agent.

For instance, if the experience mod rate is expected to drop substantially, you might consider purchasing a guaranteed cost program with a flat dividend. But if there is an increase in the modifier, especially in the debit range, you should improve its safety program.

READ MORE5 Reasons You Can’t Lower Your Experience Mod

Review Final Experience Mod

Your official experience mod should be issued by the appropriate board or bureau at least six weeks prior to the anniversary date.

Unfortunately, this is not usually the case because rate changes may be pending, carriers involved in the experience period may not have filed their information in a timely manner, or—in some cases—the rating organization is simply behind in its paperwork.

Your official experience will be received within 90 days after the expiration date. When it is published, obtain a copy of the calculation.

Insurance agents must obtain a signed letter of authority from the business owner to request the full experience modification worksheet.

If there are significant differences between your test and official experience mod, then payrolls should be checked, losses in the test rating should be compared to those in the final rating, etc.

One reason for the difference could be that workers' compensation premium rates changed during the period between the test and official ratings. 

READ MOREWorkers Compensation Experience Mod Audit Review

Correct Experience Mod Errors

If experience mod rating worksheets are not periodically reviewed, inaccuracies may slip into the calculations, resulting in paying a higher premium than necessary.

Errors in experience modification rating calculations are common. Auditing the experience rating calculation worksheet is crucial in catching errors and oversights.

Different kinds of errors might be made when calculating experience modifiers. Some of the most common are reviewed below. 

Check Payroll and Losses Used

Experience mod rates are calculated by rating bureaus. Each company has a risk identification number.

In the process of keypunching information, the data entry clerk can transpose two numbers so that a company may lose some of its experience, have another firm’s experience included in its calculation, or have a higher loss amount included than should be (say, $19,000 instead of $1,900).

Actual payrolls and losses should be checked during the test rating process, and then payrolls and losses used in the test rating should be compared to the official data.

Review Workers Comp Classification Code 

The worker's compensation classification code assignments should also be reviewed every few years.

Class codes change and evolve, and new class codes sometimes are introduced.

Also, companies are evolving, diversifying, and engaging in emerging industries in today's global environment. Employers also expand into other states—which brings their unique exposure.

Each industry class carries its own “expected losses.”

Also, beware of reporting payrolls into lower-rated class codes or underreporting payrolls to carriers’ auditors to save a few premium dollars. Lower-rated classes (or reduced premiums) will result in lower expected loss ratios and lower expected losses. 

Subrogation Of Claims

Many worker injuries are caused by the negligence of third parties. Pursuing any subrogation possibilities in which a third party’s negligence resulted in an employee’s injury can also help control the experience mod rate.

Examples include claims that result from the failure of a piece of equipment or a vehicular accident in which another party is at fault.

Carriers should be notified immediately of any third-party involvement, and employers must participate in the investigations of claims with subrogation possibilities.

Once any dollars are recovered, those amounts can be credited against the losses in the experience mod calculations.

LEARN MORE: RogueRisk365 puts you in a position to “Win” the insurance game.

Noncompensable Claims

Some claims that employees present to their employer may not be compensable workers' compensation claims.

Examples of "Noncompensable Claims" include:

  • An employee may sustain an injury at home and try to claim that it was occupation related.
  • Injuries sustained by employees while traveling to and from work.
  • An employee may aggravate an old disease or injury.

While defending the claim, the insurance company will also establish a reserve, often on a worst-case basis.

This reserve will be maintained until the claim is resolved, often in court.  Make sure you periodically check past claims to determine if any were in dispute and if they were successfully defended. 

Duplication of Claims

Claims included in experience rating data should be carefully checked for duplication errors.

Considering the billions of characters input into the experience rating system, some errors are bound to occur. For instance, a claim of $2,100 could be input as $1,200.

A $7,000 claim could have an extra zero accidentally added to become a $70,000 claim.

Other errors involve duplication of claims. For example, a claim might be shown open for $40,000 as of the last valuation date and subsequently be closed for $41,000. The closed amount of $41,000 could be included in the data provided by the carrier without the open reserve of $40,000 being deleted. .

This would inflate losses by $40,000.

There have been cases of employees who tried to file the same claim in more than one state.

If insurance companies set up two separate files, they may show as reserves in two states where only one should be indicated.

Ownership Changes

Ownership changes, including mergers, acquisitions, and spin-offs, and changes in the nature of a company’s operations can have significant effects on how the company’s experience modification factor is determined.

This is one of the most complex areas of the experience rating process, so you should seek expert advice in these situations.

Be alert to these types of circumstances.

Other Techniques for Managing Experience Mod

Every dollar a carrier pays in benefits to an injured worker will affect the employer’s experience modifier and the resulting worker's compensation premiums for three full years.

Therefore, measures that control or limit workers' compensation claims payments have the added benefit of minimizing the experience modification.

Occupational Medical Providers

One technique for controlling modifiers is to utilize occupational medical providers (where allowed by state statute) that provide quality care and have a mutual commitment to bringing injured workers back to work.

While your company must be very cautious about directing care for an injured employee, it is beneficial to all parties when the medical provider corresponds with the employer in providing care that is reasonable and commensurate with the injury that occurred. 

Light or Modified Work Duty

Offering light or modified duty (where allowed by state statute) can reduce or eliminate lost wage dollars from being reported into some experience modification factors.

This is because of the amount of medical expense–only claims are included in the experience rating computation.

The injured worker continues their medical recovery while contributing to the company. 

Drug-free Workplace

Some state statutes may also allow for similar penalties imposed on workers' compensation benefits, such as violating a safety rule or positive drug and alcohol tests.

The state workers' compensation penalties could result in lower dollars being used in the modification factor calculations while reinforcing a safe, drug-free culture in the workplace.

Loss Control Procedures

Implementing a loss control program that promotes a strong and consistent safety culture will also help control experience modifiers, especially if the commitment to the program is embraced throughout the organization.

Employers should continue to take advantage of loss control training and education that is offered by carriers, brokers/agents, and independent safety experts.

Completing accident investigations and using that information to enhance your safety program will improve the future overall bottom line of the organization—not to mention helping to create a positive influence that can attract qualified employees to work in a safe environment.

The Rub

It's important to keep track of your EMR over time so that you can take advantage of any potential savings opportunities available.

Carriers review a business’s EMR annually, and changes in risk levels could result in a reduction or increase in premiums charged. Therefore, if you want to save money on workers’ compensation costs, you should review your EMR periodically and take advantage of any discounts carriers offer.

By understanding how the experience modification rate works and taking steps to improve it, businesses can potentially reduce their workers' comp costs significantly.

With little effort, employers can lower their EMR score and enjoy the benefits of cheaper premiums. However, they must also keep accurate records and monitor their score over time so they don't miss out on potential savings opportunities.

By following these tips and staying informed on how the system works, employers should be able to lower their EMR scores and save money on worker's compensation costs in no time.

This is where we come in at Rogue Risk.

If your current insurance professional has never addressed issues like this with you before, I will encourage you to contact us today.

I look forward to introducing you to a new viewing of your insurance program.

Thank you,

Ryan Hanley

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