What is a Workers’ Compensation Experience Modification Rating, and How Can it Lower Your Clients’ Workers’ Compensation Costs?
In the business world, one of the largest expenses employers will face is that of workers’ compensation insurance. Workers’ comp was developed to protect employers and their staff, giving them the financial stability to grow without the monetary risks associated with on-the-job injuries and illnesses. In certain high-risk industries – those with dangerous operating environments that can lead to employee injuries – workers’ comp insurance can be prohibitively expensive. Employers are continually seeking means of reducing overhead expenses, and the Experience Modification Rate may hold the keys to lower insurance premiums.
What is an X-Mod?
The Experience Modification Rate, known as the X-Mod in the state of California and as “E-Mod” or “Experience Mod” in other states, is a means by which a given company’s workers’ compensation claims experiences are compared to similar types and sizes of businesses. As recently as 2011, 38 jurisdictions have some form of E-Mod system, which is calculated by the National Council on Compensation Insurance (NCCI) or an independent agency. In simple terms, an X-Mod is much like a credit score; it helps determine the annual premium rates charged by an insurer for appropriate workers’ comp coverage. A better score, like the way credit scores influence interest rates, generally means lower premium rates.
The E-Mod is calculated using a complex formula that uses statistical information on injury claims and types of businesses to compare like business operations. Expected losses are calculated against a company’s actual losses resulting from workplace injuries and illnesses. The formula includes numerous variables, such as:
- Actual primary losses
- Credibility primary value
- Credibility excess value
- Expected losses
- Actual excess losses
How Does an E-Mod Lower Premium Rates?
Again, it can be valuable to think of credit scores and their influence on loan interest rates to understand how an E-Mod works. The E-Mod rate or factor gives insurers the information they need to balance potential risks with expected and unforeseen losses in any given year. The difference between an X-Mod and a credit score is in the factor itself; a higher credit score means a lower interest rate, while the lower the X-Mod value, the lower the premium.
An E-Mod calculated to be 100% does not raise or lower premiums – 100% is considered the baseline from which premiums are calculated. A rate higher or lower than 100% does, however, causes insurance providers to adjust premiums up or down.
Here are two examples to clarify how the E-Mod influences premium rates:
- A company that has a calculated E-Mod of 125% has a higher ratio of losses as compared to similar companies. Therefore, workers compensation insurance providers will adjust the annual premium to an increase of 25%. A company paying $10,000 in workers’ comp premiums will now have to pay $12,500.
- Another company with an E-Mod of 80% will see a reduction in premiums by 20%; if that company is currently paying $10,000 in premiums, the new rate will be $8000.
It is important to note that in some jurisdictions, an E-Mod over 100% may lead to safety inspections by OSHA or other regulatory agencies and may result in significant fines and penalties.
How Can a Company Lower its X-Mod?
It is clear that a lower Experience Modification Rating reduces the overhead expenses associated with workers’ compensation insurance. How, then, can a company lower its E-Mod to take advantage of the potential savings? There are several steps a company can take, including:
- Implementing company-wide safety procedures and training programs.
- Improving ergonomics with equipment designed to reduce repetitive-use injuries.
- Improving employee pre-screening, especially for risk-prone employees.
- Rewarding employees for safe workplace behaviors.
- Implementing a rigorous accident investigation and reporting system.
- Improving claims management, especially in resolving open claims in an efficient manner.
These steps do not directly result in a lower E-Mod, but by reducing workers’ comp claims, the reduction in losses goes into calculating the experience mod factor for the next year. The end result is a lower E-Mod and a drop in premium costs.
About Caitlin Morgan
Caitlin Morgan specializes in insuring assisted living facilities and nursing homes and can assist you in providing insurance and risk management services for this niche market. Give us a call to learn more about our programs at 317.575.4440.