Many employers have their workers’ compensation premiums adjusted according to their experience modification.
However, too many employers don’t understand how this number is calculated or how it affects their premiums.
“The experience modification is an adjustment that is made to the workers’ compensation insurance premiums of companies that meet or exceed a certain size level,” says Dennis Ianovale, a vice president with ECBM Insurance Brokers and Consultants. “If your annual premium is more than $3,000, an experience modification will be assigned.”
Smart Business spoke with Ianovale to learn more about the experience modification and how it affects your premiums.
Who calculates the experience modification, and how is it calculated?
Experience modifications are calculated by ratings bureaus set up to collect data from the insurance companies and promulgate rates. Most states use the National Council of Compensation Insurance (NCCI). Some states, including Delaware and Pennsylvania, have their own ratings bureaus.
The ratings bureau bases its calculations on the prior year’s payroll and losses against industry averages in similar workers’ compensation classifications. The computation takes into account a rolling four-year period, using the first three of the last four years.
The insurance company has a responsibility to report this information at least six months prior to the experience modification coming out.
How does the experience modification affect employers?
The experience modification adjusts the premium based upon past loss history. If the company performed better than average, it receives a credit against the standard premium. If its losses were higher than average, the premium is debited.
Obviously a higher-than-average loss history results in higher costs for the employer and can result in increasing its costs against those of its competition. Conversely, better-than-average loss experience reduces expenses, resulting in higher profitability. Because losses are, to a large extent, controllable, it is an area of overhead that you can manage.
Additionally, in some industries, primarily construction, the experience modification is increasingly being used as a benchmark of safety when a company is bidding jobs. It is common to have within the bid specifications a requirement that the bidding company have an experience modification under 1.0. If your experience modification is higher than 1.0, you’re not even allowed to bid the jobs.
