Posted on May 17, 2014
After a few years of having workers compensation insurance, companies may open their insurance statement to learn that they have earned a rating called an experience modification factor or ex-mod. Depending on what that experience modifier is, there will either be sighs of relief or moans of frustration. Why? Well, the experience modification rate can really affect a company's workers compensation premiums. It will either reduce or increase the rates.
Since many companies already dedicate a huge portion of their expense budget to commercial insurance coverage, the experience modification can be a real relief in tough economic conditions. Depending on the state, companies earn ex-mods once they meet a certain premium threshold over several years. Some states require a minimum of $5,000 a year to as much as $10,000 in a year to qualify for experience rating.
Once a company has sufficient enough experience with paying workers comp premiums and also handling claims (if any), the state's rating bureau will calculate an adjustment or ex-mod based on the company's payroll and loss history. So for instance, if a company receives a 125% or 1.25 experience modification rate, it means that they will pay a surcharge of 25 percent on their workers compensation insurance. If their modifier is 70% or .70, then they receive a 30 percent discount on their coverage.
Once a company receives an experience mod rate, they are recalculated every year at policy renewal. The formula calculates payroll in each class code compared with average loss information on all employers in the state with the same class codes. Then it compares that payroll information with three previous policy years of loss information. So for instance, an ex-mod for 2012 would skip the most recent year (2011) and look at payroll and losses for 2008, 2009 and 2010. The 2013 mod factor would drop 2008 and look at a window of payroll and losses for 2009, 2010 and 2011.
So if a company has a bad year full of claims in 2010, they would have to wait for 3 years until that one bad year dropped out of the calculation. That means the losses for 2010 would not drop off the ex-mod until the rating for 2015.
This example of how claims affect experience rating is the reason why many employers must focus on safety and injury prevention programs for employees. While not all accidents can be prevented, companies can limit the amount of injuries by focusing on removing all workplace hazards and properly training employees on safe practices. Keeping claims low can have the most impact on experience modification rating and ultimately, the price that companies must pay for their workers compensation insurance.