Experience Modification- How it Works

There are a a great amount of misconceptions regarding the Experience Modification Factor in many states.Basically this is an adjustment made to the Workers’ Comp insurance premium of businesses that meet or exceed a certain size. This is measured in manual premium and varies jurisdiction to jurisdiction. However, a business that has been paying $5,000 in manual premium for the past few years or has paid $10,000 or more in a single recent year qualifies to be experience rated.

An adjustment factor will be formulated for such a business based on prior years’ payroll and loss data, essentially comparing the loss data of that particular company to average loss data for all other employers in that state who share the same classification codes. The experience modifier is a multiplier that is applied to the calculation of manual premium.

So if your company’s modifier is 1.50, you get a 50% surcharge on your premium. If your modifier comes out at a .60, you get a 40% discount. Normally, the experience modifier for a business will get recalculated annually, timed to coincide with the policy renewal.

Exerience modifications are formulated by rating bureaus. California uses the WCIRB, for example, which is a rating bureau independent of NCCI.) But California has its own separate rating bureau. Some of these other rating bureaus are run by their state governments. Modifiers calculated for California, Delaware, Pennsylvania, Michigan, and New Jersey are stand-alone modifiers, meaning that they are used only on premium charges for those individual states, even if the company also has operations in other states. But rating data from Indiana, Massachusetts, Minnesota, and New York gets integrated into a single multi-state modifier when a company has operations in other states.

Another common misconception is that the experience modification factor compares a company’s past premiums with past losses. It does not. Instead, the formula compares actual reported loss information for that particular employer with average loss data for all employers in that state who are also in the same classification codes.

Most experience modification factor calculations use data from three prior policy years, but sometimes mods can be calculated using fewer policy periods. The usual “window” used for the payroll and loss data goes back four years for the first policy year, and also encompasses the next two policy years. The most recently-completed policy year is excluded from the “window”. For example, a mod effective August 1, 2001 would use policy data from the policies effective in 1997, 1998, and 1999. The data from the 2000 policy would not enter the “window” until the 2002 mod, when the data from the 1997 policy would drop out.

Since the mod is calculated based on data reported to the rating bureau by an employers’ past insurers, incorrect or incomplete data can cause incorrect experience mods. It can be worthwhile for employers to review these mod calculations, to make sure the calculation is complete and accurate.

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