There are lots of different names and abbreviations people use to talk about Experience Modifiers – X-Mod, E-Mod, Mod, etc.
But they all mean the same thing to businesses – DOLLAR$
Workers’ compensation is required by law for all businesses in Pennsylvania with employees. And for most businesses, this is their 2nd or 3rd largest operating cost outside of payroll.
And it can be a real struggle to keep workers’ compensation rates low. After having annual premium increases, many employers have no idea how to effectively reduce this cost.
Do you struggle to manage your workers’ compensation costs? Is your business experiencing work comp premium increases?
One of the most misunderstood components of work comp is the experience modifier. To address the cost of this line of coverage, you need to take a close look at your experience modifier.
Your experience modifier is one of the primary drivers that impact your workers’ compensation premium.
So if it’s that important to determining how much you spend on work comp, it should also be pretty important to you to dig in and understand it.
Do you understand your experience modifier?
To clear up misunderstandings and myths about your experience modifier, I’ve compiled these top 10 truths that explain the significance of this rating and why it has to be addressed if you want to take control of your workers’ compensation costs.
- Insurance companies rely heavily on your experience modifier to determine your worker’s compensation premium.
- Your experience modifier is within your control.
- Experience modifiers are calculated differently in different states.
- Your experience modifier is calculated annually.
- Most insurance agents don’t understand experience modifiers.
- There can be errors in how your experience modifier is calculated.
- Your experience modifier shows how you stack up against your peers.
- Your experience modifier is volatile.
- Your experience modifier has a long-term impact on your insurance premiums.
- A high experience modifier can prevent you from getting certain job contracts.
#1 Insurance companies rely heavily on your experience modifier to determine your workers’ compensation insurance premium.
Your experience modifier is a rate that the insurance companies are required to use to arrive at your insurance premium amount. This rating is a comparison of your business’s past losses to the “average” losses of other businesses in your same industry.
So essentially, the insurance company has a rate that they charge for workers’ compensation for your industry.
The insurance company takes your experience modification rate and multiplies it against their standard rate for your industry. This is how they determine the amount they will surcharge you or give as a discount on your workers’ compensation insurance.
For example, your insurance company charges premium as a percentage of your payroll. So if your experience modifier is 1.3, you will be charged 1.3 times more (30%) than your competitors with “average” claims.. Even worse, your peers that have little-to-no claims and a .7 experience modifier could be spending 70% less on work comp.
And beyond this, your insurance company will also use your experience modifier to add additional credit or surcharge to your premium as well.
Bottom line – your experience modifier has an enormous impact on your workers’ compensation costs.
#2 Your experience modifier is within your control.
Many business owners don’t realize the amount of control they can exert over their experience modifier. That’s understandable.
What is unacceptable is that many insurance agents don’t realize they can help their clients control the factors that impact their experience modifier.
By avoiding or minimizing claims, you can keep your experience modifier lower. Implementing practices like a return to work program, a physician’s panel, and a documented claims process will help your business manage any claims. Your insurance agent should make these practices a priority for your business.
You can also partner with a risk management firm to help you drastically improve your experience modifier. And you’ll keep your employees safer, happier, and more productive.
#3 Experience modifiers are calculated differently in different states.
Every state has an entity that determines the calculation for every business’s experience modifier. In Pennsylvania, it is the Pennsylvania Compensation Rating Bureau (PCRB). In Delaware, it’s the Delaware Compensation Rating Bureau (DCRB).
The states of Ohio, Wyoming, Washington, and North Dakota all have their own self-insured work comp program and their own state rating bureau.
And in 39 states, the National Council of Compensation Insurance (NCCI) determines the experience modifier in those states.
Your experience modifier calculation method is determined by your state. You can check with your insurance agent if you have questions about your state’s rating bureau.
#4 Your experience modifier is calculated annually.
Six months after your workers’ compensation policy expires, your state’s rating bureau or the NCCI will update your experience modifier.
To do this, your insurance company will submit information to the rating bureau about your past claims including open claims. They will also submit information about your payroll.
After receiving the information, the regulating body compares you against your peers.
Then, they calculate your experience modifier based on how you compare to your peers’ workers’ compensation claims. They are comparing you to businesses doing similar work across the state (or across the NCCI footprint).
Your experience modifier is your individualized score. And each year, your business gets an updated score graded on the curve compared to your peers (more on this in #7 below).
#5 Most insurance agents don’t understand experience modifiers.
I can’t tell you how many times I hear insurance agents claim that a business’s experience modifier is controlled by the state. They say something like, “It is what it is. There’s nothing we can do. It’s outside of our control.”
That is not at all true!
Your experience modifier is determined by your workers’ compensation claims.
Your agent should offer you resources to help take control of the factors influencing your experience modifier – ie. claims mitigation, HR resources, and risk management resources to name just a few.
And they should also review your experience modifier to ensure its accuracy.
#6 There can be errors in how your experience modifier is calculated.
While this is not a common occurrence, some businesses suffer from errors in how their experience modifier was calculated. This happens in a couple of different scenarios.
First of all, if you have any open claims, your experience modifier will be calculated according to the projected costs of those claims.
If you have an open claim that should have been closed, your experience modifier will be calculated as if all those projected costs were actually paid.
Second, if your payroll or claim data are not accurate because of data entry mistakes or errors that occurred when transferring or inputting your data by the insurance company, your experience modifier will be inaccurate.
Some companies process this information manually. Human error can play a role in an inaccurate experience modifier.
If this happens, your insurance agent can request that your experience modifier be adjusted. Your agent will need to submit information on your behalf to the insurance company and/or PCRB or the rating bureau in your state.
#7 Your experience modifier shows how you stack up against your peers.
All businesses within the same industry are compared to one another when it comes to experience modifiers.
So if you are an HVAC company, your business will be compared to other HVAC companies like yours. If you are a roofing business, you will be compared to other roofers.
How exactly will you be compared?
The amount of money the insurance company spends on your workers’ compensation claims will be compared against the average amount spent on claims that other businesses in your industry file annually.
A 1.0 experience modifier is assigned to businesses that fall into that average category. If you have the same expected losses as the insurance company anticipates, you will be assigned a 1.o.
If you do worse than the insurance company anticipates, your experience modifier will be higher than 1.0.
And for any companies with an experience modifier above 1.0, the insurance company will be required to enforce the surcharge determined by the governing body – in Pennsylvania the PCRB.
If your business has fewer claims than anticipated, your experience modifier will be below 1.0. Your business will receive a credit determined by PCRB on your renewal.
#8 Your experience modifier is volatile.
Your experience modifier can fluctuate wildly depending on your workers’ compensation claims.
With a large workers’ compensation claim, your experience modifier can jump as much as 25% per year. And because your experience modifier is determined from a period of three years, it can compound to a 95% increase!
Paying for insurance is expensive enough without that increase!
And your premium will also be impacted by the debits or pricing tools insurance companies use to further surcharge your premium amount.
With workers’ compensation claims, your premium amount can escalate quickly!
And as I mentioned above, insurance companies rely heavily on your experience modifier to determine your workers’ compensation costs.
#9 Your experience modifier has a long-term impact on your insurance premiums.
When your business files a workers’ compensation claim, it doesn’t impact your experience modifier on the next renewal. But, and this is a big but, it will impact the following three renewals. And it may even impact your fourth renewal.
After your workers’ compensation goes up, it can take years to get your experience modifier back down. Even for companies that go claim-free for three years, they will find that their insurance premiums only go down 25% at a time.
I have seen businesses who based on four years of claims free work comp should have been awarded a .700 experience mod, but because of how high their experience mod rose they only dropped to a 1.000 exp. mod. On a $100,000 base premium, they would overpay roughly $30,000!
#10 A high experience modifier can affect your ability to get job contracts.
Did you know that higher premiums are not the only negative result of a high experience modifier?
General contractors and project managers sometimes rely on your experience modifier to determine if they will offer you a contract. More and more often this is the case.
Because your experience modifier reflects how well your business does at mitigating claims, general contractors and managers use this information to weed out businesses that might end up with a claim while working for them.
One more thing, if your experience modifier is above 1.0, your business will be flagged within ISNetWorld, PEC Veriforce, AVETTA, Comply Works, or other third-party compliance firms.
So if you want to do work for any company that looks at your history, you’d better implement a strategy to keep your experience modifier in check.
Now that you know how important your experience modifier is, what can you do to take control?
High premiums and lost work. Two significant reasons to ask this question: What can I do to take control?
Many businesses don’t know what they can do to take control of the factors that are driving their workers’ compensation costs up.
And for those businesses, I have good news.
You can take practical steps to lessen your claims and improve your experience modifier. There is hope!
Now, you need to know that reducing your experience modifier will require a commitment to a long-term plan. You will have to identify the factors that are causing your business to suffer claims as well as other practices you can put in place to prevent injuries and high-cost claims.
As they say, we didn’t get here overnight, and we’re not going to get out of here overnight.
The Baily Blueprint
At Baily Insurance, we work with our clients to develop a plan to eliminate claims or lessen their impact.
We have a variety of tools and resources to effectively implement the plan and make significant strides in improving not just their experience modifier but their whole insurance program.
To get started, we meet with our new clients and take them through a process that identifies areas of strength and weakness in their current program. Then, we put together a list of recommendations to help them take back control.
To give you an idea of what that process looks like, I’d invite you to take a look at these two articles:
The Baily Risk Management Roadmap – 3 Steps to Determining if We Are a Good Fit for Your Business gets into the nitty-gritty about the actual process we take clients through. A little bit about each meeting, what we accomplish, who needs to be there, and what our clients receive.
The other article, 5 Steps to Creating an Effective Commercial Insurance Program, gives an overview of the factors we look at when helping our clients create a robust long-term plan. This plan will reduce insurance premiums, create a safer work environment, and ensure your business has the insurance coverage in place that it needs.
If you’re ready to get started on that long-term plan, our workers’ compensation experts would love the opportunity to look at your current insurance plan and assess if our process would add value to your business.